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Morgan Stanley: US Rates Strategy - Crunch Time for Liquidity

April 11, 2025

Key Insights & Recommendations

📉 Market Conditions & Catalysts

• Tariff escalation catalyzed risk asset sell-off, spilling over to funding markets.
• Funding markets showed strain (SOFR touched FF LT +17bp), but remained far from true stress (vs. 2019/2020 crises).
• Repo tightness stems from a higher floor, not reserve scarcity.
• April 15 tax receipts ($400bn+ expected) will drain liquidity, pushing up funding rates.

📈 Recommendations

1. Stay short SERFFJ5 (anticipated rate spike ahead).
2. Close SFRM5Z6 flattener and enter SFRZ5Z7 steepener based on economists' scenarios:
   • Mild recession (30%): Fed cuts 25bp starting Sept 2025, reaching 1.50-1.75% by 2026.
   • Adverse (10%): Fed cuts 100bp in 2025, 225bp in 2026, terminal rate 1.0-1.25%.

📊 Outlook

• Earlier and deeper Fed rate cuts expected in adverse/downdraft scenarios.
• Trade steepener (SFRZ5Z7) for exposure to Fed policy normalization via curve steepening.

Disclaimer

Morgan Stanley Research is subject to conflicts of interest due to business relationships with covered entities. Ratings are relative and not equivalent to buy/sell recommendations.