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Interest Rate Observations From Morgan Stanley
Morgan Stanley, which recently made the daring call for a 5.5% yield on the 10 year by the end of 2010, and which has recently caught the attention of many finance pundits, provides some more projections for 10 year rates not only in the US but globally. Curiously, out of all countries, Morgan Stanley only sees Japan lower by the end of 2010, with all developed countries higher, but none moving as much as the US. Furthermore, by the end of 2010, only Australia will sport a 10 year rate wider than the US, predicts MS.
The recent evolution of the credit market in the US is seen on the next slide: if indeed the 10 year hits 5.5% this will be the first major break of the secular trendline ever tighter since the 1980's bull market. Can someone make the case that all a key reason for secular market gains over the past 30 years have been on the back of a consistently lowering cost of debt capital? We think the answer is a resounding yes.
The last observation highlights the expectation that the 2s10s curve will steepen to a record 325 bps by early Q2. Whether this happens as quickly as expected will depend on the presence of an "accelerant" which MS defines as the following:
- High degree of sensitivity to higher rates
- Spreads versus Rate levels from a credit perspective
- Hedging higher rates is comparable to hedging lower equity prices from an equity perspective
- Asymmewtric risk profile in MBS which is skewed to higher rates.
What is missing are the implications for the economy if MS is indeed right. But those are all too obvious, which is why the Fed will do everything in its power to prevent that from happening.
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Why?
When is the printmaster going to give us the shot in the arm already? Complete ZIRP and erratic monetary policies are making even the planners' lives difficult, could it be?
Here in Aus, the RBA is so far consistent in its determination to raise rates. I'm choosing to be optimistic that it will continue to do the right thing, although no doubt the political pressure is going to be heavy against and increasing throughout 2010. We are among the most indebted people in the world, surpassing even the Americans in personal debt which is 100.4% of GDP now (up 71% in the last 5 years), almost 90% of which is mortgage.
Business credit appetite is falling like a stone here, about flat for housing, and rising for personal credit, which is a vile mix and I for one applaud the RBA for applying the brakes, even if only in response to bond market pressure.
A couple of days ago the Australian Prudential Regulation Authority released a discussion paper on a proposed Financial Claims Scheme, specifying procedures for bank failure. This preparation is necessary but ominous, as our government prepares to pull back its stimulus measures of last year. We will see if they follow through on this.
With REAL unemployment (factoring in under- and long-term unemployment) at around 15%, it promises to be a rather interesting year ahead here one way or the other. I don't think MS is far off the mark when it comes to Aus.
(For figures, see http://www.whocrashedtheeconomy.com/blog )
The Fed will do everything in its power to stop it...
It will not have to - deflation will do it. This is a debt crisis, an enormous debt overload to pay down. The US economy will not get off the ground. Period. The QE and stimulus is futile and simply extends the period of adjustment.
Apparently Morgan Stanley have not read their Minsky. It appears Morgan Stanley do not understand the nature of Ponzi schemes and their aftermath.
Or maybe they do, perfectly. And they will take the other side of the trade as others pile in to short Treasuries on their say-so.
There must be some point where the Fed loses control of interest rates.
Your premise assumes they ever *had control of interest rates* in the first place.
Your premise is dead wrong.
the rate structure will steepen as defaults mount. money will be scared into USTs for years and years.
if i was a big "TBTF" US bank - and i wanted to foreclose upon and seize the assets of my customers - I would send a deflationary wave through the economy, and would then increase rates so that none (but those with Putin-esque connections) could survive.
Really these guys are brilliant. you've got to hand it to them
Daring call?
Is predicting a Gorilla will throw shit against a wall daring these days?
The Fed wants lower long term rates? But yet buys up short term?
The Fed wants lower long term rates? But yet they issue advisories on the yield curve?
The Fed wants lower long term rates? But yet that's how they earn their revenue?
The Fed wants lower long term rates? But yet how does that help their banks?
The Fed wants lower long term rates? I wonder.
That my dear sir made me LOL. I will start to use that instead of SHTF.
Not that I'm a Fed fan, but I go with Prechter on this, they are usually reactive.
I think we may kiss 6.5-6.85% easily barring MASSIVE intervention. Possibly even a 7.15-7.35% print for a day or two this year. Sprott hit on hit thanks to Tyler posting that for everyone and the reality of the supply does not make our bonds or corporates any more attractive with a dying currency than any other nation's offerings.
We'll know when it hits the fan when we see an auction of the 10 or 30 and a BTC of 2.25 or less.