US: Inverted yield curve at year-end – Morgan Stanley

Will US Treasury yields move higher? Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley, forecasts an inverted yield curve at year-end with two-year Treasury yields reaching 3.25% and ten-year yields near 3%.

Outlook for government bonds depends on more than just central bank policy

“We now expect the Fed to deliver two more 50 basis point rate hikes this year, then downshift to a series of 25 basis point moves. At the end of the year, they see the Fed funds target range at 2.5% to 2.75%, and the Fed's balance sheet on its way to $6.5 trillion.”

“We expect front end yields to trace market-implied forward yields, largely consistent with two-year Treasury yields reaching 3.25% by the end of the year.”

“Demand from investors looking to hedge risks to a weaker outcome for global growth will likely show up in the longer end of the Treasury curve. We think the ten-year yield will end the year near 3%, which is a level we were at not that long ago.”

“We're forecasting an inverted yield curve at year-end. With inflation remaining high and growth slowing, discussions of stagflation or outright recession should continue to lead investor debate this year. And ultimately, that should limit the degree to which Treasury yields rise into year-end.”