Morgan Stanley
  • Thoughts on the Market
  • Oct 21, 2020

What's Going On With The U.S. Bond Market?

With Michael Zezas
U.S. Public Policy Research for Investors


The yields on 10-year and 30-year Treasuries are now at multi-month highs, prompting some investors to ask “What’s going on?” Analysis from Head of U.S. Public Policy Michael Zezas.

In this Thoughts on the Market series, Michael Zezas offers perspective on how U.S. public policy affects equity and fixed income markets, including trade tensions, infrastructure and government policy. Listen to this week’s update.

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Current Episode Transcript

Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, October 21st, at 11:30 a.m. in New York.

What's going on with the bond market? As a fixed income analyst it always gets my attention when the Treasury market moves as it has the past few months. The 10-year yield is up .3%, and the 30-year yield is up .4% since late summer. These are meaningful moves. So what gives?

We think this is all about the bond market starting to price in the fiscal policy path of the U.S., including the impact on that path from the upcoming U.S. election. As we've discussed at length here before, 3 of the 4 most likely election outcome configurations enable an expansion of the U.S. deficit by clearing a path for $1T+ of COVID-19 stimulus relief. And in the case of a clean sweep by either Republicans or Democrats, additional expansion through pursuit of tax cuts or spending becomes likely. Market prices, of course, reflect investors' expectations of the future, and so it makes sense that as we get closer to the election that Treasury yields could rise to reflect the increased possibility of the impact of fiscal expansion. Greater supply of treasuries and increased prospects for growth and inflation are all things that can push bond prices lower and yields higher, by increasing Treasury supply relative to demand.

This is why we've cautioned investors to expect treasuries to remain under pressure during election season. It's one of the 'straightaways' we identified in our recent report 'U.S. Election: Road Rules for Investors'. Straightaways are asset classes where election outcomes either keep that market on the same path or accelerate it along that path. We also identify other asset classes as "detours", where an election outcome could cause its market to deviate temporarily from its current path, creating an opportunity to buy the dip or sell the rally. U.S. equities fit in this category. We remain concerned that selling pressure could arise from a democratic sweep if investors become concerned about higher taxes and see an increasingly attractive alternative in bonds given higher yields. But ultimately, we think that pressure would fade, with investor confidence building on a solid U.S. growth story boosted by more fiscal support.

So the lesson from the bond market here is this: expect volatile moves across markets this election season. Our advice for how to cope with this comes in the form of a quote from former Treasury Secretary Tim Geithner: 'plan beats no plan'. In an upcoming episode, my colleague Andrew Sheets and I will be sharing our plan.

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