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

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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.

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