Morgan_Stanley_Fixed-US_Rates_Strategy_Buy_Vol,_Ignore_Calendars-114668818_18页_1mb

Morgan Stanley Research: US Rates Strategy

• Interest rate volatility significantly increased due to tariff-induced uncertainty and market stress, particularly in short-dated options.
• Short-dated rates options outperformed long-dated ones; investors should buy 1-year volatility outright and avoid fading this trend.
• Calendar steepeners (selling near-term vol to buy long-term vol) are discouraged due to potential losses from vol-of-vol risk and uncertainty in risk markets.
• Recommended trade: Long 1y2y straddle at 180bp upfront; stop-loss at 114bpv; target for 135bpv.
• Key risks include rapid resolution of tariff negotiations, economic downturn, or increased market stress.
• Exhibit data shows elevated vol surfaces and high implied/realized vol correlations, supporting the vol-buying recommendation.