Morgan Stanley(US:MS)2025-07-04 03:04Investment Rating - The report maintains a bullish stance on U.S. Treasury duration and recommends staying long in curve steepeners [6][41]. Core Insights - The report highlights a dynamic labor market with slower private payroll growth but a low unemployment rate, indicating lower potential growth and equilibrium rates, which may lead to more Federal Reserve rate cuts [6][9][32]. - The employment report shows strength in state and local government jobs, particularly in education, which contributed significantly to overall payroll growth [10][11][22]. - The report suggests that as market-implied trough rates decrease, U.S. Treasury yields are expected to fall, supporting a bullish outlook on U.S. Treasury duration [35][41]. Summary by Sections Labor Market Analysis - The June employment report indicates slower private payroll growth, with a tighter labor market due to a decline in the labor force participation rate [9][32]. - State and local governments added 80,000 jobs in June, with education jobs accounting for 63,000 of these [11][12]. - The report notes that fewer teachers left for summer break than anticipated, which may have artificially boosted the seasonally adjusted figures [18][22]. Economic Outlook - The report emphasizes that lower potential growth will likely weigh on the equilibrium interest rate, suggesting that the Fed may need to cut rates more than currently expected [33][34]. - It is anticipated that the Fed's longer-run target rate may need to be adjusted downward over time [33][34]. Investment Strategies - The report recommends maintaining long positions in U.S. Treasury securities, particularly in the 5-year maturity sector, and suggests a UST 3s30s yield curve steepener [41][46]. - Specific trade ideas include maintaining long positions in UST SOFR swap spreads and SFRZ5 futures, with targets set for various instruments [46][49].