Stay in Steepeners, Maximize Vol-Adjusted Carry and Roll: US Rates Strategy | North America

Research evidence excerpt

Not for redistribution without written consent of Morgan Stanley

M

Idea

August 7, 2026 10:51 PM GMT

US Rates Strategy | North America

Morgan Stanley & Co. LLC

Matthew Hornbach

Strategist

Stay in Steepeners, Maximize

Vol-Adjusted Carry and Roll

Martin W Tobias, CFA

Strategist

Shaun Zhou

Strategist

The July employment report ended hopes of a labor market

rebound, yet markets still price a higher trough fed funds rate

than our economists forecast. Repricing to their 3.50% average

takes UST 10y to 4.30% from 4.65%. Stay in UST 7s30s

steepeners, where vol-adjusted carry and roll pays most.

Aryaman Singh

Strategist

Eli P Carter

Strategist

Key Takeaways

On the spot curve, UST 7s30s steepeners offer an attractive 3m vol-adjusted

carry and roll ratio, nearly twice 5s30s and the highest reading since mid-2022.

The market-implied path fits a US aggregate demand shock at 58% probability,

far above the 2.2% four-quarter run rate for private domestic final demand.

The market-implied trough fed funds rate sits at 3.94%, atop its 3-year range.

Repricing to our economists' 3.50% average puts UST 10y at 4.30% from 4.65%.

Maintain UST 7s30s steepeners, DV01 neutral, at 70bp with a target of 100bp

and a trailing stop of 58bp. Carry and roll pays while the front-end reprices.

Maintain SFRV6 96.125/96.25 call spreads for 4 ticks and SFRM7M8 steepeners

at -9.5bp, targeting -4bp to own a tradable rally into the midterm elections.

Click here for our Bloomberg Ticker Almanac.

Please add me to your distribution list.

Morgan Stanley does and seeks to do business with

companies covered in Morgan Stanley Research. As a result,

investors should be aware that the firm may have a conflict of

interest that could affect the objectivity of Morgan Stanley

Research. Investors should consider Morgan Stanley

Research as only a single factor in making their investment

decision.