Macro Boring, Yields Roaring is the title of Morgan Stanley’s latest Global Strategy Outlook, and it’s pretty much the perfect encapsulation of where Wall Street sees markets going these days.
What it basically means is, the economy and the market will keep humming along, growing, rising, etc. while the recent decline in government bond yields will turn around and start to spike.
To back up for a moment, this market is essentially defined by three broad themes which can be expressed in three simple charts.
The first is the S&P 500, which represents risk appetite. Stocks are at all-time highs, and though there have been a few hiccups, markets impressively push higher. An important note is that the S&P 500 is just one of many markets that’s been on a tear. From Europe to India, new highs are being made all over the place as investors snap up risk.
The next chart is the yield on the 10-year bond. Despite concerns about Fed tightening, an accelerating economy, and constant Wall Street yammering about how “interest rates have nowhere to go but up” yields remain very low, and have actually fallen so far in 2014. And again, the 10-year chart is a proxy for a story that is global: Yields everywhere have been falling aggressively, including peripheral Europe.
And the final chart we’ll show is the VIX, which is a measure of volatility in the stock market. It’s basically at all-time lows, which again mirrors a global phenomenon. Whether we’re talking about interest rates or currencies, markets are incredibly un-volatile.
So this is our market. Risk being bought, interest rates very low, and almost no volatility to speak of anywhere.
The outlook from Wall Street is (and Morgan Stanley is basically the most succinct at expressing it): The good times will continue to roll for a while, but interest rates are unsustainably low and government bond yields will shoot higher as it becomes more clear that the economy is firming and the Fed will hike rates at some point.