Morgan Stanley lowers 10-year Treasury yield forecast to 0.95%

(Reuters) – Yields on the benchmark 10-year U.S. Treasury note should end 2020 just under the 1% level, Morgan Stanley said in a recent research report that pointed to dovish moves by the Federal Reserve and other factors that led it to lower its yield forecast.

The investment bank said it expects a 0.95% 10-year yield at year-end, down from a previously forecast 1.15%, citing the Fed’s recent shift toward average inflation targeting and its signaling of “an implicit cap on yields.”

Other factors that have changed since June include “higher probability of disappointment on fiscal stimulus” to bolster the coronavirus-hit economy as Republicans and Democrats in Washington remain far apart, and an uncertain election period, which could “drive a flight-to-quality premium in Treasuries,” according to the report.

Morgan Stanley also said with its expectations diminished for a near-term rise in 30-year yields, it recommended taking off yield curve steepeners such as long five-year Treasury Inflation-Protected Securities (TIPS) versus short 30-year nominals and continued to suggest holding long five-year TIPS trade outright.

(Reporting By Karen Pierog in Chicago; Editing by Dan Grebler)