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Morgan Stanley says rising 10-year Treasury yields is reasonable as confidence in U.S. economy grows

Morgan Stanley said the rise in 10-year Treasury yields is reasonable and a reflection of the growing confidence in the U.S economic outlook, according to Jim Caron, global fixed-income portfolio manager at the investment bank.

The 10-year Treasury yield jumped above 1.7% on Thursday, its highest level in more than a year. It came even though the Federal Reserve reassured investors that it had no plans to hike interest rates anytime soon, nor ease its bond-buying program.

The yield on the 30-year Treasury bond climbed 3 basis points to 2.472%. Yields move inversely to prices.

The recent increase in bond yields does not indicate a tightening of financial conditions, according to Caron.

“The way that I see it is that as we sit here around 1.75%, 1.7% in the 10-year note, I think this is a reasonable area where we can expect some consolidation,” he said Friday, referring to how the yield will likely remain within a range, neither continuing much higher or reversing much.

“Because this is the level that the market had expected that we would get to, on a more dovish than expected Fed announcement. And that’s what we got,” he told CNBC during “Squawk Box Asia.”

‘Wildly bullish’ on U.S. growth

After the Fed’s two-day policy meeting concluded Wednesday, the U.S. central bank said it sees stronger economic growth than previously estimated, forecasting gross domestic product would rise to 6.5% in 2021. This is higher than the projected 4.2% GDP increase that was predicted in December.

The Fed also expects core inflation to hit 2.2% this year, but has a long-run expectation of it sticking around 2%. 

Michael Spencer, chief economist and head of research Asia-Pacific at Deutsche Bank, echoed a similar view, stating it is “entirely natural that long bond yields are going up.”

“Everybody is wildly bullish on U.S growth. We expect through the course of this year, the economy is going to grow 7.5%,” he told CNBC’s “Squawk Box Asia.”

Confidence is coming in as states are reopening, people are getting vaccinated and the infection rates are going down.

Jim Caron

global fixed-income portfolio manager, Morgan Stanley

“I don’t think what we’ve seen is disorderly. I think we have to expect by the end of the year, 10-year bond yields are going to be two and a quarter (percent), or higher.”

The rise in Treasury yields is a reflection of the strong growth momentum for the U.S. economy after the recent $1.9 trillion coronavirus relief package signed by the Biden administration last month, said Caron. He added this is likely to boost confidence as the country rebounds from the coronavirus pandemic.

“Confidence is coming in as states are reopening, people are getting vaccinated and the infection rates are going down. Certainly, all these extra money sloshing around from the relief plan and payroll protection programs is going to be helpful. That’s going to really help with confidence and consumption — consumption being 70% of GDP,” Caron said.

Caron also downplayed concerns that the fiscal relief package could lead to higher inflation.

“I don’t know how inflationary this actually is. There has been a lot of printing of money. However, what we have to see is the velocity, which means the economic activity really starts to pick up to an extent that it actually creates inflation. And we’re not seeing that just yet,” he noted.


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