Just two days after Economist Jeremy Siegel and Wisdom Tree research director Jeremy Schwartz said that there's a bubble brewing in the bond market that will cost investors dearly, Morgan Stanley, the most bearish among government securities traders, acknowledged that its forecast that Treasury yields would rise this year was misguided.
“We got our rates call wrong and missed a great opportunity to be long on bonds this year,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in a note to clients yesterday. “The market is currently rife with tactical relative value opportunities and that’s what we will focus on going forward.”
Warning of continued weakening in the economy, the Fed recently announced its plan to buy additional long-term Treasurys which would indicate a more aggressive policy. As expected, they also kept the fed funds rate near 0%. This is the central bank’s primary weapon to stimulate the economy by spurring spending and has not been hiked since December 2008
We are still reeling from the collapse of the credit and housing bubbles. US banks have written down about $1 trillion of bad mortgages while failing to write adequate new loans. This has seriously hurt small businesses who rely heavily on bank credit. Banks have found that buying Treasuries with their free government money makes more sense than lending it out to small businesses and individuals. With unemployent hoovering near 10% and the real estate and industrial markets weak, the deflationary pressures in the economy are so great that it is doubtful the Fed will start raising interest rates anytime soon barring some catestrophic event.
Now, it’s no secret that the responsibility for a huge amount of private-sector debt has been transferred to the taxpayers and will ultimately need to be paid. However, at this point, short of a massive selloff of bonds by foreign investors, the inability to auction off Treasury-bonds by the Fed or macroeconomic conditions starting to show some significant signs of improvement, a precipitous hike in interest rates and and a large capital loss in bonds is unlikely in the near term
“We got our rates call wrong and missed a great opportunity to be long on bonds this year,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in a note to clients yesterday. “The market is currently rife with tactical relative value opportunities and that’s what we will focus on going forward.”
Warning of continued weakening in the economy, the Fed recently announced its plan to buy additional long-term Treasurys which would indicate a more aggressive policy. As expected, they also kept the fed funds rate near 0%. This is the central bank’s primary weapon to stimulate the economy by spurring spending and has not been hiked since December 2008
We are still reeling from the collapse of the credit and housing bubbles. US banks have written down about $1 trillion of bad mortgages while failing to write adequate new loans. This has seriously hurt small businesses who rely heavily on bank credit. Banks have found that buying Treasuries with their free government money makes more sense than lending it out to small businesses and individuals. With unemployent hoovering near 10% and the real estate and industrial markets weak, the deflationary pressures in the economy are so great that it is doubtful the Fed will start raising interest rates anytime soon barring some catestrophic event.
Now, it’s no secret that the responsibility for a huge amount of private-sector debt has been transferred to the taxpayers and will ultimately need to be paid. However, at this point, short of a massive selloff of bonds by foreign investors, the inability to auction off Treasury-bonds by the Fed or macroeconomic conditions starting to show some significant signs of improvement, a precipitous hike in interest rates and and a large capital loss in bonds is unlikely in the near term
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