Morgan Stanley: The era of U.S. Treasury yields above 4% is over.

Under the impact of multiple macro uncertainties, the era of 10-year U.S. Treasury yields above 4% may be coming to an end. According to news from Chase Wind Trading Desk, a Morgan Stanley analyst team stated in a report released on October 10th that the era of 10-year U.S. Treasury yields above 4% is drawing to a close. With a series of economic and political headwinds emerging, the previously widespread market optimism is now facing serious challenges. The latest blow to investor confidence stems from the simultaneous escalation of domestic and foreign policy tensions in the United States. Significant changes have occurred in the ongoing U.S. government shutdown, with some federal employees now facing layoffs. The report emphasizes that, compared to previous shutdowns where employees were merely furloughed, this is a “new territory” that adds to future uncertainty. At the same time, uncertainty around trade policy is on the rise again. These negative developments are jointly pushing investors toward safe-haven assets, putting downward pressure on Treasury yields. Analysts believe that against this backdrop, the probability of cyclical recovery in the U.S. economy is decreasing. Investors should “face up to and bid farewell” to the era of 10-year Treasury yields starting with a “4.” Optimism Pillars Collapse, Double Shock Hits The report points out that in recent months, investor optimism about the U.S. economic outlook was mainly based on five pillars: - “Immunity” to years of recession fears; - Financial conditions have significantly loosened; - The Federal Reserve’s plan to cut interest rates; - Market belief that the peak of trade policy uncertainty was passed in April; - Expectations of future fiscal stimulus. However, as recent developments have unfolded, these pillars are exhibiting “major and widening cracks.” The core challenge facing the market right now is the dual impact of the government shutdown and trade tensions. On one hand, the consequences of the government shutdown are becoming more severe. Citing the Wall Street Journal, the report notes that the U.S. government has initiated “Reduction in Force (RIF),” which will affect “thousands of federal employees.” This marks a shift from temporary disruptions to more permanent damage. On the other hand, trade tensions are once again in focus. These moves have shattered investors’ earlier belief that the worst had passed, causing indices measuring economic policy uncertainty to rise again. Economic Outlook Shifts: Era of “4% Yields” Hard to Sustain Morgan Stanley believes these “exogenous shocks” are occurring near the trough of the economic cycle’s slowdown, thereby reducing the possibility of economic rebound rather than driving recovery. The report further analyzes that the negative impact of tariffs may be more manifested in labor market deterioration rather than higher inflation. Therefore, the bank remains bearish on the inflation outlook, especially at the front end of the curve. The cooling of inflation expectations will open the door for the Federal Open Market Committee (FOMC) to adopt a “more aggressive easing cycle,” and may push the market-implied federal funds rate trough to a new low within the year. Based on judgments about the macro outlook, Morgan Stanley suggests investors adjust their fixed income strategies. The report notes that currently, only the 8-, 9-, and 10-year maturities on the Treasury yield curve within 10 years still have coupon yields above 4%. With risks of economic slowdown increasing, these “4%-plus” yields will also be hard to sustain. Therefore, the bank continues to advise investors to “lengthen U.S. Treasury duration, focusing on the 5-year segment.” In addition, the report reiterates trade recommendations such as putting on 3s30s steepeners on the Treasury yield curve to cope with potential future policy easing and economic changes. ~~~~~~~~~~~~~~~~~~~~~~~~ The above content is from [Chase Wind Trading Desk](https://mp.weixin.qq.com/s/uua05g5qk-N2J7h91pyqxQ). For more detailed interpretations, including real-time analysis and frontline research, please join [Chase Wind Trading Desk▪Annual Membership](https://wallstreetcn.com/shop/item/1000309). Risk warning and disclaimer The market is risky; investments need to be cautious. This article does not constitute personal investment advice, nor does it take into account individual users’ specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their particular situations. Investment decisions made accordingly are at your own risk.