FAST FIVE: Morgan Stanley Explains The One Thing That Has Kept Treasury Rates Low
Morgan Stanley Explains The One Thing That Has Kept Treasury Rates Low Tyler Durden Tue, 05/26/2020 – 15:30 Over the weekend, Morgan Stanley's rates strategist Matthew Hornbach, published an interesting report discussing the difference between narrow and broad liquidity, and whether soaring US deficits will “crowd out” the liquidity provided by the Fed, by draining it into Treasury purchases, thereby preventing it from entering the broader economy and resulting in an even greater collapse in the velocity of money.
While Hornbach's conclusion is that such concerns are generally unwarranted (and in a remarkable coincidence, at exactly the same time on Friday, JPMorgan's Nick Panigirtzoglou published a report on exactly the same topic, reaching the exact same conclusion), he did make the following key points: Concerns have risen that, given the large fiscal stimulus package the US government passed, the forthcoming issuance of Treasury securities will drain that liquidity provided by the Fed.
The issuance of Treasury bills, notes, and bonds, along with the associated government deficit spending, does not drain the narrow liquidity.
Well, there is just one snag: there is a very simple reason why yields aren't blowing out and it has nothing at all to do with equilibrium supply and demand, or frankly with the capital markets which post-March 23 no longer exist.
But don't take our word for it, here is Morgan Stanley: What has kept Treasury yields low.