Morgan Stanley's Scenarios for 2 Percent Treasury Rates

Wednesday, 18 Dec 2013 07:27 AM

By Dan Weil

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Morgan Stanley estimates that 10-year Treasury notes will yield 3.45 percent at year-end 2014, while two-year notes will yield 1.15 percent.

But the firm outlines scenarios under which either yield could end next year at 2 percent. Late Monday, the 10-year yield stood at 2.88 percent and the two-year at 0.33 percent.

The path for yields boils down to what the economy does, Morgan Stanley analysts say in a commentary obtained by CNBC.

Editor’s Note:
New Video: Obama Plans to Redistribute Seniors’ Wealth

"A much stronger economic growth trajectory, coupled with an aggressive tapering schedule and less focus on rate guidance, brings rate hike expectations to January 2015," the analysts say. That's what would push the two-year yield to 2 percent.

Aggressive tapering could mean a $25 billion-per-month reduction of Federal Reserve bond buying at its meeting this week, according to Morgan Stanley.

On the other hand, "a return to muddle-through growth data and continued disinflation [could] prompt additional easing, including a 5.5 percent unemployment rate threshold [for raising interest rates] and a 1.5 percent inflation floor," the analysts say. That's the case for a 2 percent 10-year yield.

The economy grew 3.6 percent in the third quarter.

The market is now strongly focused on whether the Fed will announce a tapering of quantitative easing at its meeting that ends Wednesday.

"The question for the Fed will be, is the growth sustainable enough to taper this month?" Larry Milstein, managing director of government-debt trading at R.W. Pressprich, tells Bloomberg.

"The market is pretty well split on that prospect. Because of that, we shouldn’t stray far from these levels."

Editor’s Note: New Video: Obama Plans to Redistribute Seniors’ Wealth

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