'The mood music just changed' in bond markets, Morgan Stanley says

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  • Morgan Stanley says US 10-year bond yields are unlikely to climb back to their recent highs.
  • Recent global data points point to a subdued outlook for global growth, which will help spur bond demand.

Bond markets took centre-stage last week as benchmark US 10-year treasuries pushed towards the 3%.

But after reaching a high of 3.03% — just below the January 2014 mark of 3.05% — US 10-year yields almost immediately edged lower to close the week at 2.96%.

And according to Morgan Stanley’s global rates strategists, that signals “an ominous sign for the bond bears”.

The analysts said multiple factors in global markets contributed to last week’s price action.

For starters, ECB President Mario Draghi was measured in his comments accompanying the central bank’s interest rate announcement on Thursday night.

The UK also had a bad miss on GDP while Japanese inflation data was soft. And the Bank of Japan extended the time-frame for inflation to reach its 2% target during Friday’s interest rate announcement.

And while recent data shows the US is now the only G10 economy with positive data surprises, Morgan Stanley said the underlying picture isn’t as rosy.

While hard data points such as GDP and durable goods orders have been solid, the soft data — such as consumer sentiment surveys — is starting to decline.

“Of note, soft economic data has been coming in weaker relative to expectations in recent months by more than it has since before the US presidential election,” the analysts said.

According to Morgan Stanley, that points to a more cautious outlook on growth which will be accompanied by demand for safer assets such as bonds.

The bank’s global rates team has taken a decidedly bullish view towards US government bonds so far this year.

In January, they predicted US 10-year bond yields would fall to just 1.95% by the end of 2018.

They highlighted two key events on Wednesday which are likely to drive the price action in bond markets this week.

There’s the US Fed’s interest rate announcement, with no changes expected to the official cash rate.

And the US treasury department will outline its quarterly funding plans, with another increase in bond issuance expected to account for increased spending and the Trump administration’s December tax cuts.

“Without any surprises, we could see the Treasury market break to lower yields led by the long end of the curve,” Morgan Stanley said.

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