Morgan Stanley sees the 10-year Treasury rising to 5.5 percent.
Treasurers mulling their 2010 funding calendars may want to nail down their needs sooner rather than later. Morgan Stanley economists expect benchmark Treasury rates to soar next year, with the 10-year note’s yield hitting 5.5 percent, a 40 percent rise from current levels. The government’s massive funding needs, growing investor risk appetite and concerns across the board about sovereign credit are among the factors to blame. Also, the recent behavior of Treasury Inflation Protected Securities indicates that investor concern has swung sharply away from deflation and toward the possibility of inflation (See “TIPS Predict Higher Benchmark Rates Ahead“).
Morgan’s prediction is more dire than most. A survey of 60 economists by Bloomberg returned an average forecast yield of 3.97 percent for the 10-year at the end of 2010. But short interest for the current note has ballooned in recent weeks. And the record-tying $118 billion of debt the government plans to issue this week—when many buyers are on holiday—is unnerving the market.
The Federal Reserve’s saber rattling about reversing its quantitative easing program (initially by draining excess reserves from the banking system) could also affect benchmark rates. Banks have been plowing cash into Treasuries, keeping their rates fairly range-bound. If, as expected, the Fed’s moves leave banks with less cheap cash to invest, it could reduce their demand for government debt. The upside: ending their borrow-from-and-lend-to relationship with the government might cause banks to put more capital behind riskier private-sector lending.