Morgan Stanley Strategist Says Bond Market Pricing Some Sort Of Recession But Equity Market Still In Denial

Morgan Stanley Chief U.S. Equity Strategist and CIO Mike Wilson reportedly said the bond market is effectively pricing some sort of a recession at this point, while the equity market is still in denial.

"When the yield curve goes negative, it has high predictability that a recession will be coming within twelve months. But 12 months is a long time. The real trouble starts when the yield curve re-steepens. Because that’s essentially the bond market saying the Fed’s going to have to be cutting here at some point," Wilson told Bloomberg TV.

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Price Action: Yield on two-year treasury notes fell from over 5% levels seen in early March to as low as 3.8% last week in the backdrop of the banking crisis in the U.S. as the shuttering down of the Silicon Valley Bank led investors to rush into the safety of short-term treasuries. The yield on the notes has risen back to 3.96% at the time of writing.

"The yield curve has bull steepened by 60 bps in a matter of days, something seen only a few times in history and usually the bond market's way of saying recession risk is now more elevated," Morgan Stanley analysts led by Wilson wrote in a note.

Markets witnessed significant bouts of volatility over the last two weeks following the unfolding of the crisis which many feared would end up in contagion. However, following UBS Group AG's UBS rescue deal announcement of Credit Suisse Group AG CS, as well as the coordinated action by central banks around the world to boost liquidity, major Wall Street indices witnessed some bit of relief.

The SPDR S&P 500 ETF Trust SPY closed 0.96% higher and the Invesco QQQ Trust Series 1 QQQ gained 0.35%. The Vanguard Total Bond Market Index Fund ETF BND closed 0.43% lower.

Market participants are now eyeing the Federal Reserve's two-day policy meeting that starts on Tuesday. The CME FedWatch Tool shows over 73% probability of a 25 bps rate hike during this policy compared to over 26% chance of status quo.

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