Us debt rose four months in a row, why are still a few top investment banks bearish?

Spark Global Limited reports:

As the outbreak in the US turned on its head last week and the market became more sceptical about the prospects for an economic recovery, us treasuries continued to rise, in fact, for the fourth consecutive month. Still, Wall Street giants are sticking to their bearish stance.

The epidemic situation is grim and the economic outlook is not optimistic

Every state in the US reported more COVID-19 cases in the past week than in the previous week, according to Johns Hopkins University.

Last week, San Diego, Calif., and Los Angeles both saw their biggest single-day increases since February, with Los Angeles’ hospital admissions more than doubling in two weeks. And in Florida, new cases nearly doubled in two weeks, from 7.8 percent in the week of July 2 to 15.1 percent last week, according to state health data.

Spark Global Limited reports:

At present, the novel coronavirus has increased the difficulty of global epidemic prevention, and put forward higher requirements for vaccination and government governance. The number of new infections in the United States climbed again this week. People are concerned that if the mutant strain spreads and causes a new wave of epidemic, it will undo the gains made in the earlier economic recovery.

According to statistics, the United States is currently under great inflationary pressure. The CONSUMER price index (CPI) rose 5.4 per cent in June from a year earlier, while the core CPI rose 4.5 per cent, the biggest year-on-year rise since November 1991. John Williams, an American economist, has even suggested that the US is at risk of hyperinflation, with inflation now at 13.5%.

Analysts say the current low interest rates on U.S. treasuries reflect the market’s pessimistic outlook for the economy, which is overdone compared to reality.

Overview of Institutional Views

The Fed has already committed to buying $120bn of Treasuries and mortgage-backed securities each month until “further material progress” is made in the recovery. Fed Chairman Jerome Powell has said discussions about an eventual tapering are ongoing, but there is intense debate over the timing and pace.

Morgan Stanley argues that while new evidence continues to show that vaccines are highly effective in reducing severe illness, hospitalizations and mortality. But the bank disagrees that growth is slowing. In fact, the second quarter GDP tracked by the bank’s U.S. economists was closer to 12%. While they expect the pace of growth to slow, they still see a strong economic recovery. On this basis, Morgan Stanley firmly recommends shorting the 10-year Treasury.

Analysts note: The yield on the benchmark 10-year Treasury note fell to its lowest since early February and stocks sold off sharply, just a week after the S&P 500 hit an all-time high and volatility surged. As always, markets are forward-looking, reflecting not only expectations for a strong recovery in the global economy, but also uncertainty on the road to recovery.

The bank notes that the recent collapse in Us Treasury yields is actually due to unwinding positions. In addition, the improved prospect of congress passing an infrastructure package will put upward pressure on yields.

Matthew Hornbach, global head of Macro Strategy, said:

“Economic data is certainly one of the factors that will keep interest rates going up. We disagree that economic growth is slowing. In fact, the second quarter GDP tracked by our US economists was close to 12%. While they expect the pace of growth to slow, they still see a strong economic recovery. Their base case forecasts for US and global growth in 2021 (7.1 per cent and 6.5 per cent, respectively) remain unchanged.”

Iain Stealey, international chief investment officer for fixed income at jpmorgan chase, expects 10-year Treasury yields to rebound to between 1.5% and 2% by the end of the year. But for now, jpmorgan has not increased the size of its short position in US treasuries, saying it would be “more comfortable to see the market improve” before making any real moves.

The net supply of Treasurys fell in June compared with previous months as more outstanding debt came due, according to Citigroup. While many investors have been holding bearish positions for months, they are reluctant to expand those positions by selling more bonds when the market turns sour.

Scott Thiel, chief solid income analyst at BlackRock inc., said while the recent resurgence of the pandemic has indeed dented optimism in the bond market, it is not to the point where we see little new selling today.

It still thinks the restart is real and the economy is recovering. But in the current environment, Treasury yields are too low and the market is too pessimistic about the economic outlook.

On the other hand, concerns about the economic recovery are fueling bond buying. Antoine Bouvet, senior rates strategist at ING, said:

“On the face of it, this level is consistent with a recessionary environment… “There is some moderate scepticism about the strength of the recovery, which suggests a further increase in demand for safe assets even as central banks continue to buy most of them.”

But Bouvet also questioned the strength of the U.S. bond buying spree, saying, “I’m not sure the market really thinks that.” Analysts say the combination of buyers and sellers has pushed yields down too far. At the same time, a strong economic recovery could reverse the decline in yields for some time to come, prompting a rally in Treasuries.

Morgan Stanley Investment Advice

U.S. debt

Still firmly advising against the 10-year Treasury, which is expected to end the year at a yield of 1.8%.

The dollar

It will continue to strengthen in the short term. The growing divergence between the TRAJECTORY of inflation and monetary policy in the US and other large economies is a reason to be bullish on the dollar.

Agency MBS

Maintain a long-term structural reduction view. The prospect of fed tapering and recovery, albeit from low levels, means that demand for agency MBS from both the Fed and banks, the two biggest buyers, is likely to fall at the same time, supporting the case for a reduction.