Morgan Stanley says bonds set to surge in 2016 Year of the Bull

[NEW YORK] Morgan Stanley, one of the Wall Street banks that deals directly with the Federal Reserve, cut its bond yield forecasts for 2016 and said the US central bank will wait until December before raising interest rates.

"The global backdrop for rates markets looks so supportive that 2016 may become known as the 'Year of the Bull'," according to a report the company issued Sunday by analysts including Matthew Hornbach, head of global interest-rate strategy in New York.

Most major economies will do worse in 2016 than 2015, the report said. Central banks in Europe and Japan will keep easing monetary policy, while the Fed and the Bank of England will delay raising rates, according to the firm. Treasury 10-year yields will fall to 1.45 per cent by the end of September, the analysts wrote, approaching the record low of 1.38 per cent set in 2012. The Fed and the Bank of Japan will refrain from taking any action in meetings this week, based on Bloomberg surveys of economists.

A 2016 rally in Treasuries, the world's biggest bond market, ran contrary to the selloff projected by Bloomberg's surveys of economists as plunging stock and oil prices sent investors to the safety of government debt. Borrowing costs fell in almost every industrialized nation, with average yields on $23 trillion of bonds falling to 0.69 per cent in February, the lowest on record based on Bloomberg indexes that go back to 2010.

Benchmark Treasuries were little changed Monday, with the 10-year note yield at 1.97 per cent as of 6:33 am in London, according to Bloomberg Bond Trader data. The price of the 1.625 per cent security due in February 2026 was 96 7/8.

The 2016 bond rally is being driven by the unprecedented monetary easing that central bankers in Europe and Japan have undertaken to revive their economies. The European CentarCB surprised investors last week by lowering its deposit rate to minus 0.4 per cent, increasing its bond buying and incorporating company debt as part of its purchases. In February, the BOJ added negative rates to its quantitative-easing program.

US yields will probably diverge from those in Europe and Japan, said Peter Jolly, the Sydney-based head of market research at National Australia Bank Ltd, the nation's biggest lender by assets.

'No Upside Pressure' "In Europe and Japan, there's no upside pressure on yields," Jolly said. "In the case of the United States, we do see upside pressure. We think that the Federal Reserve will come back and raise interest rates a couple times this year." The probability the Fed will increase its benchmark at last once this year is about 77 per cent, futures prices compiled by Bloomberg indicate.

Morgan Stanley, one of the 22 primary dealers that trade with the Fed and underwrite the US debt, has been advising investors to buy bonds this year, saying in a January report that "the bull market is here."

BLOOMBERG