Morgan Stanley predicts 10-year Treasury bond yields will jump more than 40 percent next year, while 30-year fixed mortgages may surge more than 50 percent.
The exploding budget deficit will do the damage, David Greenlaw, Morgan Stanley’s chief fixed income economist, told Bloomberg.
“When you take these kinds of aggressive policy actions to prevent a depression, you have to clean up after yourself,” he said.
“Market signals will ultimately spur some policy action, but I’m not naive enough to think it will be a very pleasant environment.”
The firm predicts the 10-year Treasury yield will reach 5.5 percent next year from about 3.85 percent now.
And it forecasts the 30-year fixed mortgage rate will hit 7.5 to 8 percent, the highest level in a decade and up from about 5.3 percent now.
The budget deficit ballooned to $1.42 trillion in fiscal 2009 (ended Sept. 30), and Morgan Stanley sees the gap remaining above $1 trillion as the Obama administration and Congress attempt to revive the economy with spending.
The jump in mortgage rates could derail the nascent recovery in residential real estate, threatening the entire economic rebound as well.
Not everyone sees the rise in long-term interest rates as negative for the economy.
“When the (yield) curve is wide and upward sloping, as it is today, it tells us that the economic future is good,” CNBC commentator Larry Kudlow wrote in his Moneynews.com column.
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