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Morgan Stanley (NYSE:MS) predicts the US Fed will forgo raising interest rates in September and in December, and Janet Yellen, and the other Fed policy makers said nothing in Jackson Hole, WY, to change the firm’s outlook.
US Treasuries pared a decline Tuesday after Vice Chairman Stanley Fischer in his ‘jawboning” did not reinforce a market interpretation of his recent comments that a rate increase in September cannot be ruled out.
The Wall Street firm is recommending investors continue to buy 5-year US Treasuries, even as the securities head for their worst month since February of Y 2015.
Fed Chairwoman Janet Yellen said Friday the case for higher rates had strengthened, driving the market-implied odds of an increase at the 20-21 September policy meeting to 42% that day, from 24% at the start of that week.
Mr. Fischer, who suggested a jobs report due Friday will be Key, said Tuesday that the Fed is sensitive to the economic situation outside of the US.
The overall US jobs data may disappoint, says JPMorgan Chase & Co (NYSE:JPM).
“We found little at Jackson Hole to sway our view on the US Treasury market,” Morgan Stanley bund strategists 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 5-year T-Notes finished +1 bpts, to 1.18% as of having risen as much as 4 bpts early in the session Tuesday. It climbed as high as 1.24% on Friday, a mark not seen since 23 June, and has gained 16 bpts this month.
The CME Fed fund futures currently indicate a 36% chance that the FOMC will raise rates at the September meeting, according to data.
Morgan Stanley has the most Bullish estimate among forecasts compiled, predicting 10-year T-Note yield will drop to 1% at the end of March next year. The median is for an increase to 1.8% from about 1.58% now. The benchmark yield reached a record low of 1.318% on 6 July.
The August payrolls data have missed the median of economists’ estimates in each of the past 5 years, JPMorgan analysts wrote in a report. The Wall Street firm is also recommending clients to hold on to their investments in 5-year Treasuries ahead of the Friday’s NFPs release.
“Yellen did not fail to deliver,” the firms director of US rate strategy, wrote in a note. “We warn clients, do not be complacent.”
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