Morgan Stanley says year of the bull will push US yield to 1%

Bloomberg

Morgan Stanley’s Matthew Hornbach called this year’s Treasury market rally. Now he’s revising his forecasts and is more bullish than just about anyone else.
Ten-year U.S. yields will fall more than 50 basis points, or 0.5 percentage point, to 1 percent in the first quarter of 2017, according to Hornbach, the firm’s head of global interest-rate strategy in New York.
“The year of the bull for rates markets is set to continue with support from politics, productivity and policy,” according to a Morgan Stanley report Hornbach sent by e-mail. “We expect growth to come in increasingly below consensus over the coming 12 months.”
With yields close to record lows, investors are watching both U.S. economic signals and foreign inflows to gauge whether to add to their holdings. Data from the Commerce Department showed new-home construction in the U.S. rose more than forecast in June, though residential starts in May were lower than previously estimated. Investors from outside the U.S. have been snapping up Treasuries as alternatives to negative yields in Japan and Europe, creating the risk that demand from those buyers won’t be enough to keep yields down if the economy picks up.
The benchmark U.S. 10-year note yield declined two basis points to 1.56 percent as of 9:51 a.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in May 2026 rose 5/32, or $1.56 per $1,000 face amount, to 100 18/32. The yield fell for the first time in four sessions. Treasuries weakened last week by the most in a year.
Morgan Stanley, one of the 23 primary dealers that trade directly with the Federal Reserve, said March 13 that the global backdrop for fixed income was so supportive that 2016 was shaping up as the year of the bull for bonds. The Bloomberg U.S. Treasury Bond Index has risen 3 percent since then, for a 5 percent gain this year. Ten-year yields set an all-time low of 1.32 percent on July 6.
This month, Morgan Stanley said it was turning neutral on fixed income as yields slid.
Wall Street investors and strategists have scrambled to adjust their forecasts for U.S. yields after last month’s surprise U.K. vote to leave the European Union spurred a global bond rally and caused traders to pare bets on the pace of Fed interest-rate hikes. Among those who’ve joined Hornbach in the camp of 1 percent on the 10-year note: Guggenheim Partners and Northern Trust Corp.
“Our view is that the 10-year is going to be closer to 1 percent than 2 percent in a year’s time,” Katie Nixon, chief investment officer of wealth management at Northern Trust, said in an interview on Bloomberg Television. For the Fed, “we’re looking at least a year out for the first rate hike, if then. The situation is just much too fragile right now.”
The risk to Morgan Stanley’s outlook is the U.S. economy growing at a faster pace, bolstering the Fed’s case to raise rates.
Traders see about a 42 percent chance of a Fed rate increase by the close of 2016, futures contracts indicate.

US Treasuries Snap
Losing Streak

Bloomberg

Treasuries rose for the first time in four days as disappointing corporate earnings sparked concern that sluggish economic growth persists, boosting haven assets.
Benchmark 10-year note yields retreated from the highest in more than three weeks as U.S. stocks fell from record levels. Treasuries advanced after Commerce Department data showed new-home construction in the U.S. rose more than forecast in June, though residential starts in May were lower than previously estimated.
Yields on 10-year notes closed Monday at the highest level since June 23, the day the U.K. voted to leave the European Union. That referendum sparked a rally in U.S. debt that sent yields tumbling to an unprecedented 1.318 percent on July 6. The gains were partly reversed last week when Treasuries posted their biggest weekly loss in a year amid encouraging economic data, including reports showing sales at U.S. retailers rose more than forecast and acceleration in a core measure of price growth.
“To retrace half of the Brexit move, that’s a significant reversal — it’s not surprising to see some buyers,” said Anthony Valeri, fixed-income investment strategist at LPL Financial in San Diego. “The Treasury market is due for a little bit of stability.”
The benchmark U.S. 10-year note yield declined three basis points, or 0.03 percentage point, to 1.55 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in May 2026 rose 1/4, or $2.50 per $1,000 face amount, to 100 21/32.
The 10-year note’s 3.8-basis-point trading range on Tuesday was the smallest since June 22, according to data compiled by Bloomberg.
Morgan Stanley and Northern Trust Corp. are bullish on Treasuries after the recent selloff, calling for 10-year yields to drop to 1 percent by next year as the U.S. economy disappoints and the Federal Reserve holds off on raising interest rates.
Morgan Stanley’s Matthew Hornbach, the firm’s head of global interest-rate strategy who called this year’s Treasury market rally, said 10-year U.S. yields will fall to 1 percent in the first quarter of 2017. Katie Nixon, chief investment officer of wealth management at Northern Trust Corp., said in an interview on Bloomberg Television that yields will be closer to 1 percent than 2 percent in a year’s time.
Investors from outside the U.S. have been snapping up Treasuries as alternatives to negative yields in Japan and Europe, pulling yields lower even amid signs the U.S. economy is picking up.
Traders see about a 44 percent chance of a Fed rate increase by the close of 2016, futures contracts indicate.