Morgan Stanley Gets Smacked After Getting Inflation Wrong AGAIN

Morgan Stanley is just getting crushed lately. 

In the second quarter, the firm got burned being on the wrong side of the inflation trade (again).

Most recently, Morgan Stanley’s interest rate group, bet that inflation expectations for the next five years would rise in Treasury markets, while forecasts for the next 30 years would fall, according to Investment News.

Investment News writes:

The spread between the 30-year and the 5-year breakeven rates, which Morgan Stanley was said to be short, has more than tripled to 69.2 basis points yesterday from a low of 19.7 basis points on May 2… the bank’s interest-rates trading group lost at least tens of millions of dollars on the trade.

We wonder if the group’s head, Glenn Hadden, will see his job at risk.

Word is that it cost Jack DiMaio (the former head of the group) his job in the fourth quarter of last year, when he predicted that the interest rates on Treasuries would trend up, towards 5%. Of course they trended down, towards more like 2.5%. He left Morgan Stanley in January 2011.

Someone familiar with the trade says, “[DiMaio] was very short Treasuries overall in Q42010. This time Morgan Stanley was long inflation-backed bonds. They need some better interest rate traders in the firm.”

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