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Morgan Stanley Capitulates, Sees No Rate Hike Until 2011, Pushes Back Call For 4.5% On 10 Year By Two Quarters

Tyler Durden's picture


The one biggest bond bear since December 2009, Morgan Stanley, has just thrown in the towel, and instead of expecting 4.50% on the 10 Year by June 30, the firm has now pushed back its target by 2 quarters. Which means that its longer 5.50% Target on 10 Years has been scrapped. The firm's strategists have also adjusted their call on Fed hikes (now expected to occur no sooner than 2011 instead of September 2010). Lastly, the firm's most vocal call, one for a substantial 2s10s steepening to 325 bps has also been moderated from Q2 to Q4. We also include the latest Rates Strategy slide deck from MS.

From Jim Caron:

Our rates call has been adjusted lower to reflect sovereign risk and we have pushed back our UST 2s10s curve steepening call of 325bps from 2Q-end to end of year. The carry trade still reigns supreme. We expect the UST 2s10s curve to be ~280bps for most of the remainder of the year, and then steepening toward 330bps in 4Q.

FROM A STRATEGY PERSPECTIVE this does not materially change our view since the core of our strategy was to play for a curve steepener. Given our new Fed call, we are even more emboldened to buy front-end forward rates and earn roll-down and carry and hedging that view with shorts in the back-end. In other words, we still like owning forward curve steepners. We also still believe that longer-tail volatility will outperform the shorter tails. Net net, we maintain our core view to be long the curve and long volatility.

Not a bad way to soak up over a trillion in Treasury supply at laughable rates, and keep funding the biggest black hole this side of the Andromeda galaxy: the US deficit.

Some other perspectives from MS' Economics Team:


Sovereign Credit Risk Means a Lower Path for US Rates

Fed on hold through year-end, lower path for yields. We now expect that the Fed will be on hold until early in 2011; previously we thought that they would begin to raise rates in September. We also now see a lower path for 10-year US Treasury yields through 2011; we expect
yields will rise from today’s 3½% to 4½% by the end of 2010, 100 bp lower than our previous forecast.

Contagion risk is the driving force for rates… The European sovereign credit crisis has capped inflation expectations, and it could reverse some of the significant improvement in financial conditions that has revived US growth. Although aggressive action by European officials to stem the crisis likely will reduce the tail risks of contagion, uncertainty remains high.

…but only a limited brake on US growth. Credit contagion won’t materially slow US growth, in our view, as US domestic fundamentals are now taking over from global support. Combined with lower US rates, changes in foreclosure mitigation policy, and extended tax cuts, domestic strength is prompting us to revise our forecasts for US real growth somewhat higher: from 3.2% to 3½% over the four quarters of 2010, and from 2½% to 3% for 2011.

Delaying tightening now gives the Fed more work to do. We think the Fed will raise the funds rate to 2½% by the end of next year, yet even that increase seems likely to put real short-term rates barely in positive territory. And while the yield curve likely will flatten after 2010, we expect another 50 bp rise in 10-year yields to 5% in 2011.

The Fed's thinking here is obvious: the hope is that the 2:45 crash is sufficient to continue issuing 10 Year at sub 4% rates. We find this laughable, and are convinced that Liberty 33 will need to orchestrate at least three more 10%+ crashes in the next 3-6 months to be assured of a glitchless soaking up of $1.5 trillion in UST supply.

Below is Morgan Stanley's Strategy Forum Slidepack for the "visual" learners.



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Mon, 05/10/2010 - 16:49 | Link to Comment Cursive
Cursive's picture

I take them at their word.  This would be good news if it were 2001 or 2007.  Now?  Bad reminder that the economy is in the crapper.

Mon, 05/10/2010 - 16:51 | Link to Comment trillion_dollar...
trillion_dollar_deficit's picture


Mon, 05/10/2010 - 17:00 | Link to Comment RobotTrader
RobotTrader's picture


Heh, might as well call this the "Superball" market...




Or even the "Super Superball"....


Mon, 05/10/2010 - 17:06 | Link to Comment MaxFrost
MaxFrost's picture

That's awesome - dropping it from a freakin' helicopter!

So how long before TLT breaks 100?

Mon, 05/10/2010 - 17:35 | Link to Comment Ophiuchus
Ophiuchus's picture

 As he pulls on the joystick and out pops a concealed weapon the COCK says in Yiddish


“Anyone for a nice banana split???”

Mon, 05/10/2010 - 19:45 | Link to Comment inflation.stude...
inflation.studentloan--0's picture

I take it the moral of the story is a "little idea" called entropy?

Mon, 05/10/2010 - 17:05 | Link to Comment no cnbc cretin
no cnbc cretin's picture

They can't and won't have a rate hike. Why? Because it will tank the US once and for all, and it will ruin any chances of Obama getting a second term. I won't vote for that tool again. So, the can is still being kicked down the road, though the can will come to a sudden stop. It's just a matter of time, and not much time.

Mon, 05/10/2010 - 17:38 | Link to Comment Al Huxley
Al Huxley's picture

The road's nearing an end, and there's nowhere to kick the can anymore.  Game is almost over (as evidenced by the move in TLT, EUR and 30 year treasuries today).  BSB can pretend all he wants, but reality is catching up to him.

Mon, 05/10/2010 - 17:06 | Link to Comment mynhair
mynhair's picture

Gee, I figured that out last week and bailed on TBT.

Vindication is nice, I suppose.

Mon, 05/10/2010 - 17:11 | Link to Comment buzzsaw99
buzzsaw99's picture

That's why they get paid the big bucks, because they're just that damn good. [/sarcasm]

Mon, 05/10/2010 - 17:38 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

2011?  There will be no rate hikes for as long as the US exists (which might not be much longer than 2011).

Mon, 05/10/2010 - 17:40 | Link to Comment Rainman
Rainman's picture

Fed must keep the 10 under 4. Or it's over.

The two bad banks are already fast circling the bowl ......with an unlimited Uncle Sugar credit line . All the choices are bad ones now.

Mon, 05/10/2010 - 18:26 | Link to Comment MaxFrost
MaxFrost's picture

Last summer somebody posted an awesome Photoshop takeoff of the movie "300", only they called it "400bps" with the tagline, "They Shall Not Pass".

I know I shouldn't base my investment theses on joke graphics I see on ZeroHedge, but it's been working great so far...

Mon, 05/10/2010 - 21:27 | Link to Comment AccreditedEYE
AccreditedEYE's picture

Exactly right and how do they do that with an equity market explosion to the upside? They need a crash and it has to materialize... this game goes poof without zirp. How do you defend zirp with inflation measures pounding down your door? Robo can correct me if I'm wrong, but LOTS of charts I looked over after the close went up to short term resistance on lower volume. VIX still looking bullish too.

Mon, 05/10/2010 - 17:40 | Link to Comment mephisto
mephisto's picture

Well hiking rates with the dollar swap lines open is asking for trouble, isnt it?

Surely dollars would just explode through the open airlock to the vacuum of,say, southern europe - or whoever else is in fiscal hell by then.

Aren't the dollar swap lines approved until Jan11? - read it somewhere... no idea where, long day...

Mon, 05/10/2010 - 17:43 | Link to Comment Gubbmint Cheese
Gubbmint Cheese's picture

Robo - more like this:


"Do not taunt Happy Fun Ball"

Mon, 05/10/2010 - 17:44 | Link to Comment thomas_anderson
thomas_anderson's picture

You can kick the can down the road...until you run out of road.

Mon, 05/10/2010 - 17:48 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

That is one lonely road.

Mon, 05/10/2010 - 17:46 | Link to Comment BlackBeard
BlackBeard's picture

Node, mechakucha ohaio-sh? no akanb?, watashi-tachi wa desu!

Mon, 05/10/2010 - 17:52 | Link to Comment Bonesetter Brown
Bonesetter Brown's picture

Strange that MS change their call now.  EuroTARP/Fed swaps drives us away from bifurcated credits and towards a unicredit world.  The 10 Yr saw strength from flight to quality; now US sovereign credits are intermingled with all the Euroland credits.  Expect interest rates to rise on Bunds and Treasuries; interest rates to come down on sovereign debt of PIGS.

Euroland contagion may have helped mask the effect of the end of QE1.0.

Other asset markets had to crash in order to support the supply of Treasuries.  European sovereigns just got un-crashed.  What asset market will step up to the plate to take one for the team?

We will certainly find out when 10-year approaches or breaks 4%.

Mon, 05/10/2010 - 18:45 | Link to Comment TruthHunter
TruthHunter's picture

Logic says IMHO, that bond rates should rise. Morgan

"knows" otherwise.  What do I know? Sounds like

flight to safety version 2.  If thats in the works, I would

expect Gold to go more or less sideways for the

next few months...not more that $1400 this year?


Is the FED really Atlas taking the whole world

on its shoulders? ... until....Atlas Shrugged...


Tue, 05/11/2010 - 09:12 | Link to Comment doolittlegeorge
doolittlegeorge's picture

there is no explaining the treasury market.  i was with morgan but, hey, as they say in the art world "you can't account for taste."  so what if the Fed can finance?  that's better than not?  or not?  in any case i'm a little "suspect" on the "crash-enomics" plan.  i thought this was all about stick saves?  until it's not?  sounds like Bernanke is running this site.

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