MS Enter Long 5y Linker

M August 14, 2026 11:45 AM GMT

UK Rates Strategy | Europe Morgan Stanley & Co. International plc+ Idea

Fabio Bassanin, CFA Strategist

We enter long 5y real yields on the back of compelling valuations and our economists’ baseline view that both the BoE and the Fed will remain on hold through year-end, which should support lower front-end real yields. We prefer real yields to nominals given their lower sensitivity to energy prices.

Key Takeaways Duration has remained relatively well supported over the past week despite no resolution to the Iran/US conflict, helped by lower real yields.

We enter long 5y real yields on compelling valuations and our economists’ baseline, with the BoE and Fed on hold through year-end.

At the front end, we retain our SFI M7/M8 steepener, positioning for a lower peak in Bank Rate and curve normalization.

On spreads, we retain a tactical long 10y ASW bias, with carry and roll supporting demand while fiscal newsflow likely to stay subdued in the very near term.

Next week, attention turns to domestic data, including July CPI, the labour- market report and the flash August PMIs.

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Interest Rate Strategy United Kingdom | Enter long 5y linker

From a positioning perspective, we retain a bullish front-end bias through an SFI M7/M8 steepener. Valuations continue to embed a substantial degree of policy tightening alongside an elevated risk premium. We therefore remain positioned for a lower peak in Bank Rate, as well as a normalisation of the money-market curve. We continue to favour whites/reds steepeners, as the curve should re-steepen if the market gradually prices out expectations of further BoE tightening. However, as long as geopolitical risks remain unresolved, we expect the market to continue to price some tightening risk, with current valuations implying roughly two additional hikes. Further out the curve, duration has remained relatively well supported this week, despite elevated energy prices and the absence of any meaningful resolution or de- escalation in the geopolitical situation. Indeed, the rally was supported by lower real yields. While there was no single obvious catalyst – the US inflation release came in broadly in line with both consensus expectations and market-implied fixings – the move likely reflected a combination of the market pricing out some Fed tightening expectations and historically elevated real-yield levels attracting demand. We remain constructive on real yields and enter a long 5y linker position, given its lower beta to energy prices relative to nominals yields and their potential to perform well should markets price out some of the additional tightening currently embedded across major central-bank curves. From a curve perspective, the curve has stabilized in recent trading sessions after having previously re-steepened, but it does not seem dislocated relative to the level of front-end rates pricing and, if anything, appears too steep. We therefore stay neutral on curves. Asset-swap…