Morgan Stanley's Top Rates Trades For 2011

Posted by Ian Cooper - Wednesday, December 8th, 2010

From Zero Hedge:

"After Morgan Stanley's call for the 10 Year hitting 4.5% in 2010 ended up being one of the worst calls of the year (together with each FX call by the Goldman team), the firm's head rates strategist Jim Caron is back on the scene with his latest set of Top Trades for 2011, as well as some views on where the fixed income market is headed next year. In summary: just fast forward the firm's bearish 2009 view on yields one year forward. After all if the firm was so wrong one year, it can't possibly be wrong two years in a row...

Below is a summary of the Top Trades for 2011:


  • 10y yields to rise, front-end yields to stay low: receive 1y1y OIS at 64.5bp, 1y rolldown of 41.5bp
  • Forward curve steepeners: 2y forward 2s10s steepener
  • Front-end receivers are attractive: Buy 3y1y receivers
  • UST 2s10s to steepen toward 260-280bp in 1Q11
  • Long 10y swap spreads. Tighter Agency and mortgage spreads
  • Longer-dated vega will drift lower as callable supply picks up in the new year. We recommend: Long USD 1y5y  straddles, delta-hedged over a 6m trade horizon
  • Inflation trades - Long 2y breakevens, 5-10y TIPS breakeven flattener"

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