Morgan Stanley says forget September as JPMorgan tips weak jobs

[SINGAPORE] 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.

The Wall Street heavyweight is recommending investors continue to buy five-year US 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 per cent, from 24 per cent at the start of that week. Vice Chairman Stanley Fischer said a jobs report due this Friday will be key. That data may disappoint, according to JPMorgan Chase & Co.

"We found little at Jackson Hole to sway our view on the US 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 three basis points, or 0.03 percentage point, to 1.19 per cent as of 8 am in London. It climbed as high as 1.24 per cent on Friday, a level unseen since June 23, and has gained 17 basis points this month.

Fed funds futures currently indicate a 36 per cent 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 UK voted to leave the European Union. The calculation assumes the effective fed funds rate will average 0.625 per cent 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 have split the market. Pacific Investment Management Co also concluded there was nothing of note in Ms 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 on Monday at 103 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 per cent at the end of March next year. The median is for an increase to 1.8 per cent from 1.59 per cent now. The benchmark yield reached a record low of 1.32 per cent 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.

BLOOMBERG