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Industry Spotlight > Wirehouse Firms

Flattening Yield Curve Is Like Surging Bitcoin to Morgan Stanley

By Brian Chappatta, Bloomberg

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To Morgan Stanley’s Matthew Hornbach, the flattening Treasury yield curve has a lot in common with the surging price of bitcoin.

For both trades, the best option is to simply buy the dips, Hornbach, global head of interest-rate strategy, wrote in a Nov. 18 note.

He recommends adding to bets that the yield spread between two- and 30-year Treasuries will continue to narrow, even though it fell to 104 basis points Monday, the lowest in 10 years. He says the curve could flatten to as low as 80 basis points by year-end, based on Fibonacci projections.

“Trading the flattener should feel very much like trading bitcoin: you’re meant to buy every dip, if you see the value proposition, even though you’ve already missed what seems like a big move,” Hornbach wrote.

The persistent flattening of the U.S. yield curve has dominated discussion in the $14.3 trillion Treasuries market as traders assess what it might mean for monetary policy. It has only steepened in five of the past 20 trading days.

Much like the price of bitcoin has almost doubled since the end of September, the yield spread between two- and 30-year debt has narrowed the most on a one-month rolling basis since December 2014.

Morgan Stanley’s Hornbach focuses on technical trends in his flattening recommendation, including using Fibonacci percentages and the amount the curve steepened in the last quarter of 2016. All told, it may end 2017 at somewhere between 80 and 103 basis points.

On a fundamental level, the flattening trend makes sense, with the Federal Reserve raising short-term interest rates in the face of stubbornly low inflation.

It also helps that the Treasury plans to issue more shorter-term debt, rather than long bonds. Yet at the same time, it’s unlikely that Fed officials will want to quickly bring about an inverted curve, which has historically signaled an impending recession.

As for the precedent of bitcoin at $8,000, well, there is none. Morgan Stanley Chief Executive James Gorman has called the cryptocurrency “more than just a fad,” while adding that people are “deluding themselves” if they expect it to be a stable investment.

Meanwhile, the yield curve is again flattening and the price of bitcoin is at a new record. So perhaps Morgan Stanley is right that it’s futile to fight the momentum of these two trades.

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