Morgan Stanley Fixed-Global Macro Commentary February 7-106409959.pdf

MUpdate2priceactionwasonceagaindictatedbyfurtherdeclinesinaregionalUSbankstock.Asdownsidemomentumabated,USTreasuryyieldsthenbegantomodestlyrise,ledbythelongend,aheadofthelargest10yUSTauctiononrecord.AnoveralluniformmessagefromFedpolicymakersthatincludedMinneapolisFedPresidentKashkari,BostonFedPresidentCollins,RichmondFedPresidentBarkin,andthefirstpublicremarksbyGovernorKugleralsolikelybiasedyieldshigher.Theoverarchingmessagewasonethatacknowledgeditwouldlikelybeappropriatetocutrates“later”or“atsomepoint”thisyear.Yet,allparticipantssought“greaterconfidence”beforemakingpolicylessrestrictiveandemphasizedthenowtwo-sidedrisksaroundtheirdualmandate.MinneapolisFedPresidentKashkaricalledfortwo-threeratecutsthisyear,asappropriate.Thebigquestionforhimiswheretheneutralrateofinterestis.Hereferencedfundamentalchangesinthebehaviorofbusinessesandconsumershavebeenlongerlastingthanexpected.HealsosaidtheFediswatchingCRE“verycarefully.”At1:00pmET,thenew$42bn10yUSTauctionstopped-outat4.093%,1.2bpthrough.Auctioninternalsinlinewiththeaverageofthelastsixnewissueauctionswasanotablefeat,giventhesizewas~17%largerthantheaverageofthelastsixnewissueauctions.RelativetotheNovemberauction,theallotmenttoindirectbiddersroseto71.0%(P:69.7%),theallotmenttodirectbiddersroseto16.1%(P:15.2%),whichleftprimarydealerswith13.0%(P:15.1%).Thebid-to-coverratioroseto2.56x(November:2.45x).Despitethesolidauction,USratesfinished~2bpcheaperacrossthecurve.IntheNYafternoon,theCongressionalBudgetOffice(CBO)releasedits2024-2034BudgetandEconomicOutlook.ComparedtotheMay2023projection,thedeficitforfiscalyear2024isprojectedtobe$0.1tnsmallerandthecumulativedeficitoverthe2024-2033periodis$1.4tn(or7%)smaller.AccordingtoCBO,thebiggestfactorcontributingtosmallerprojecteddeficitsisareductionindiscretionaryspendingbecauseofnewlyenactedlegislation(i.e.,theFiscalResponsibilityAct).AsapercentageofGDP,theFY24deficitamountsto5.6%,increasesto6.1%inFY25,andthenshrinksto5.2%inFY27andFY28.CBOprojectsFY24netinterestcostswillbegreaterinrelationtoGDPthanatanypointsinceatleast1940,at3.1%,andexpectstheinterestburdentograduallyclimbovertheirforecasthorizon.However,theyexpect10yTreasuryyieldstoaverage4.6%overcalendaryear2024and2025–around100bpabovecurrentmarket-impliedforwardsof~3.6%.Japan:JGBsinitiallyralliedonWednesday,ledbythebellyofthecurve,aftertherallyinUSTsovernightonTuesday.Long-endJGBslaggedaheadofthe30yJGBauctionatnooninTokyo.The30yauctionwasinlinewithmarketpricing,witha1.8%stop;alevelmostJapaneselifershavementionedastheirtargetforpurchases.Althoughtheauctionresultwasnotthatstrong,long-endJGBsgraduallyoutperformedintothe3:00pmTokyoclose;30yJGBsralliedby1.3bpd/d,to1.78%,onasimpleyieldbasis.However,front-endJGBsgraduallysoldoffintothe3:00pmTokyocloseandMUpdateMorganStanleyResearch3thecurvebull-flattened.TONAOIStwistflattenedalongsideJGBs,withthefrontendbetterpaid.MarketparticipantsseeminglyanticipatedahawkishmessagefromBoJDeputyGovernorUchidaathisspeechonThursday.XCCYbasisretraceditsrecentmoveandtwist-steepened,withthef