M Global IdeaGlobal Macro StrategistIn a Bull Market for Bonds...Morgan Stanley & Co. LLCMatthew HornbachStrategist Matthew.Hornbach@morganstanley.com +1 212 761-1837 Guneet Dhingra, CFAStrategist Guneet.Dhingra@morganstanley.com +1 212 761-1445 Andrew M WatrousStrategist Andrew.Watrous@morganstanley.com +1 212 761-5287 Efrain A Tejeda, CFAStrategist Efrain.Tejeda@morganstanley.com +1 212 761-3529 Francesco GrechiStrategist Francesco.Grechi@morganstanley.com +1 212 761-1009 Zoe K StraussStrategist Zoe.Strauss@morganstanley.com +1 212 761-0407 Allen F LiuStrategist Allen.Liu@morganstanley.com +1 212 761-6049 Morgan Stanley & Co. International plc+James K LordStrategist James.Lord@morganstanley.com +44 20 7677-3254 David S. Adams, CFAStrategist David.S.Adams@morganstanley.com +44 20 7425-3518 Eric S OynoyanStrategist Eric.Oynoyan@morganstanley.com +44 20 7425-1945 Lorenzo TestaStrategist Lorenzo.Testa@morganstanley.com +44 20 7677-0337 Fabio Bassanin, CFAStrategist Fabio.Bassanin@morganstanley.com +44 20 7425-1869 Marie-Anais C FrancoisStrategist Marie-Anais.Francois@morganstanley.com +44 20 7425-1877 Dominic J KrummenacherStrategist Dominic.Krummenacher@morganstanley.com +44 20 7425-9781 Morgan Stanley MUFG Securities Co., Ltd.+Koichi SugisakiStrategist Koichi.Sugisaki@morganstanleymufg.com +81 3 6836-8428 …one can only be long duration or neutral duration. We believe the bull market in core government bonds began late last year after Fedspeak and unfounded concerns about US Treasury supply created a picture-perfect bear trap. We stay tactically neutral, looking to buy dips, as downside risks arise. Global Macro StrategyWe argue the market pricing of Fed policy hasn't moved "too far, too fast" relative to the expectations for it that matter: those of market participants. While term premiums may be slightly negative over the next year of policy pricing, they appear positive over the year thereafter – offering value.Interest Rate StrategyWe stay neutral on duration, but look to add on dips. We maintain long 10s on 5s10s30s butterfly. We maintain EUR 2y1y vs 1y1y flattener and Jan/Apr ECB OIS steepener; we close EUR 2m10y 3.00%/3.30% swaption payer, RX 130.5/129.5 put spread, receive EUR 5y5y and EUR 30s50s flatteners. In cash, we keep our structural short 10y BTP versus Bund and 10s30s OAT ASW box. We enter long UKT 1T37 versus short UKT 1T57, while we keep our short 15y ASW and our tactical paying 2s5s10s SONIA fly position. We maintain TONA OIS 2s5s steepener (DV01 1.5 vs. 1), receive 10y OIS vs. sell 30y JGBs, and sell 30y JGB ASW.Currency & Foreign ExchangeWe remain neutral on USD and discuss the rates-equity correlation vis-à-vis USD movements. We also discuss recent G10 FX correlations. Long NOK/SEK should benefit from less central bank activity, supportive rate differentials, and minimal risk correlation. We see upside for AUD/CAD given the rates and metal price outlook. We discuss...
