Morgan Stanley Closes Out AT&T (T.US) Bond Trade and Takes Profits: Limited Deleveraging Progress, High Buybacks and Large Cash Reserves Raise Concerns

Morgan Stanley said in its latest report that it has officially closed out the AT&T (T.US) "10s/30s" curve steepener trade, namely buying the bond with a 4.9% coupon maturing in 2035 and selling the bond with a 5.7% coupon maturing in 2054. The spread on this portfolio has steepened from about 30 basis points last December to about 55 basis points. With the supply pressure from ECHO bond issuance fading, the profit potential has largely been realized, and Morgan Stanley chose to lock in gains. David Hamburger and his analyst team said that although the financing pressure from the ECHO spectrum acquisition has passed, high leverage and limited debt reduction remain concerns hanging over AT&T's credit. In July 2026, AT&T completed the acquisition of ECHO's mid-band 5G spectrum for $23 billion, which was the direct trigger for its short-term leverage jump. After the acquisition was completed, net leverage rose from 2.68x in the second quarter to 3.13x, slightly below management's expectation of about 3.2x. Management still maintains its target of reducing leverage to around 2.5x by 2029. On performance, AT&T delivered a mixed report card. Third-quarter adjusted EBITDA was $12.5 billion and free cash flow was $5 billion, both beating expectations; however, postpaid phone net additions were only 379,000, missing expectations, while fiber broadband net additions of 416,000 and fixed wireless access net additions of 280,000 were strong. Fiber broadband average revenue per user fell about 4% year over year, indicating that AT&T is sacrificing short-term pricing for user growth through introductory offers and bundled discounts amid intensifying industry competition; postpaid phone ARPU, however, grew 4%, and together with stable wireless churn, this provides some buffer. Between shareholder returns and deleveraging, the scales clearly tip toward the former. AT&T reiterated its target of about $10 billion in buybacks for 2026, having already repurchased $2.8 billion in the third quarter, and maintained its full-year free cash flow guidance of more than $18 billion. The company also lowered its 2027 and 2028 capital expenditure guidance by about $1 billion to $22 billion-$23 billion, but kept its free cash flow guidance unchanged, meaning the saved funds will mainly be used to pay higher interest and customer acquisition costs rather than accelerate deleveraging. In addition, management continues to maintain a high cash reserve of nearly $12 billion, but the reason for maintaining such high cash is not yet clear. Positive signals also exist. Management emphasized its fiber partnerships with Amazon.com, Inc. Cloud Technology and Microsoft Corporation, viewing them as opportunities to capture AI connectivity demand and support the long-term value of network investment; proceeds from the fiber joint venture and the sale of Mexican assets are also expected to help deleveraging in 2027. Overall, Morgan Stanley's attitude toward AT&T's credit can be summarized as neutral to cautious. Going forward, close attention should be paid to when fiber ARPU bottoms out, whether postpaid phone net additions can recover, whether capex cuts can truly leverage improvement, and whether AI connectivity demand can be realized as expected.