Treasury bull Morgan Stanley predicts the Federal Reserve will forgo raising interest rates next month, and policy makers said nothing in Jackson Hole, Wyoming, to change its mind.
Treasuries pared a decline on Tuesday after Vice Chairman Stanley Fischer didn’t reinforce a market interpretation of his recent comments that a rate increase in September can’t be ruled out. The Wall Street heavyweight is recommending investors continue to buy five-year U.S. sovereign debt, even as the securities head for their worst month since February of last year.
Fed Chair Janet Yellen said Friday the case for higher rates had strengthened, driving the market-implied odds of an increase at the Sept. 20-21 policy meeting to 42 percent that day, from 24 percent at the start of that week. Fischer, who suggested a jobs report due this Friday will be key, said on Tuesday that the Fed is sensitive to the economic situation outside of the U.S. In any case, jobs data may disappoint, according to JPMorgan Chase & Co.
“We found little at Jackson Hole to sway our view on the U.S. Treasury market,” Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra wrote in a client note. “While August payrolls present an obvious risk, we continue to believe market-implied probabilities for a September rate hike will end at zero, not 100.”
The yield on five-year notes rose two basis points, or 0.02 percentage point, to 1.19 percent as of 7:25 a.m. in New York, having risen as much as 4 basis points earlier. It climbed as high as 1.24 percent on Friday, a level unseen since June 23, and has gained 16 basis points this month.
“I have lost count of the number of times an FOMC member has tried to tell the market that that rates are going up in the near term, only for it not to happen,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London. “This near-term guidance is of negligible value to the macro investor in long-term bonds.”
Fed fund futures currently indicate a 36 percent chance that the central bank will raise rates at the September meeting, according to data compiled by Bloomberg. The probability dropped to zero in late June after the U.K. voted to leave the European Union. The calculation assumes the effective fed funds rate will average 0.625 percent after the central bank’s next increase.
Comments from central bankers during and in the run-up to the Kansas City Fed’s annual symposium last week in Wyoming have split the market. Pacific Investment Management Co. also concluded there was nothing of note for rates in Yellen’s remarks, while Goldman Sachs Group Inc. and Mitsubishi UFJ Securities Holdings Co. saw them as hawkish enough to raise the odds of action next month.
The spread between five- and 30-year Treasury yields reached the narrowest since February 2015 at 102 basis points. Shorter-tenor debt tends to be more sensitive to the outlook for monetary policy than longer-dated bonds.
Morgan Stanley has the most bullish estimate among forecasts compiled by Bloomberg, predicting 10-year note yield will drop to 1 percent at the end of March next year. The median is for an increase to 1.8 percent from about 1.58 percent now. The benchmark yield reached a record low of 1.318 percent on July 6.
The August payrolls data have missed the median of economists’ estimates in each of the past five years, JPMorgan analysts led by Jay Barry in New York wrote in a report. The Wall Street firm is also recommending clients to hold on to their investments in five-year Treasuries ahead of Friday’s release.
Source: U.S. Bureau of Labor Statistics, Bloomberg
Goldman Sachs raised its “subjective odds” of a move next month to 40 percent from 30 percent based on Yellen’s comments, economists led by Jan Hatzius wrote in a report Friday.
MUFG Securities Americas put the probability of a September hike at 49.5 percent.
“Yellen did not fail to deliver,” John Herrmann, its New York-based director of U.S. rate strategy, wrote in a note. “We warn clients, do not be complacent.”
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