While most sellside strategists take the recent rebound in US Treasury yields as the latest confirmation that the global rates rally is on its last legs (even as corporate bond issuance is approaching never before seen records, as the global chase for yields comes to the US), one bank refuses to change its long-term forecast on the 10Y, and still sees the benchmark US security reaching 1.00% in the not too distant future.
This is what Morgan Stanley's bleak forecast for the future is:
Over time, we forecast lower 10-year yields, a stronger dollar, and tactically a lower oil price.
For rates, central banks are buying a lot and there is net negative supply. We are way below consensus. Lower US real yields drive the dollar lower. For oil, receding disruption means oversupply is an issue into 1H17.
For US equities, most staple-like industries do well with lower rates. A flattening curve is good for telcos, utilities, and biotechnology, a call we are embedding in our portfolio. Lower oil should benefit airlines, retail, and autos, all areas that have not been strong recently. If the dollar strengthens, that historically was good for most financials and bad for machinery and chemicals.
Of these, the primary driver is the bank's rates forecast. Here, in four charts, is the summary explanation why, in MS's own words "we're well below consensus on rates", and sees the 10Y continuing lower until it reaches a record low 1% level. The simple answer: not enough supply, and relentless, and rising, demand from central banks.
This is where we are now:
This is what central banks are buying now and what they are expected to buy in 2016 and 2017:
As a result of CB purchases, net supply will remain negative absent a dramatic surge in gross issuance (think fiscal stimulus):
And what MS thinks will be the biggest wildcard: Japan.