Our Global Head of Fixed Income Research Andrew Sheets looks at
the implications of the U.S. government’s efforts to ease
regulations, from bank balance sheets to asset valuations.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Global Head of Fixed Income Research
at Morgan Stanley.
Today, a core theme of easing policy, and the latest iteration in
the U.S. mortgage market.
It's Thursday, January 15th at 2pm in London.
Central to our thinking for the year ahead is that we're seeing
an unusual combination of easing monetary policy, fiscal policy,
and regulatory policy – all at the same time. This isn't normal,
and usually this type of support is only deployed under much more
dire economic conditions. All this is also happening alongside
another large supportive force – over $3 trillion of AI- and
datacenter-related spending that Morgan Stanley expects all to
happen through the end of 2028.
This broad-based easing is a global theme. Equities in Japan have
been rallying on hopes of even a larger fiscal leasing in that
country. In Europe, we think that Germany will continue to spend
more while the European Central Bank and Bank of England cut
rates more than the market expects.
But like many things these days, it's the United States that's at
the heart of the story.
We think that the U.S. Federal Reserve will continue to lower
interest rates this year, even as core inflation persists above
its target. The U.S. government will spend about $1.9 trillion
more than it takes in, even after adjusting for tariffs as tax
cuts from the One Big Beautiful Bill Act kick in.
But my focus today is on the third leg of this proverbial
three-legged stimulative stool. While easing monetary and fiscal
policy probably get the most focus, easing regulatory policy is
another big lever that's being pulled in the same direction.
Regulatory policy is opaque, and let's face it can be a little
boring. But it's extremely important for how financial markets
function. Regulation drives the incentives for the buyers of many
assets, especially in the all-important banking and insurance
sectors.
It can set almost by definition what price an asset needs to
trade at to be attractive, or how much of an asset a particular
actor in the market can or cannot hold. Regulatory policy
tightened dramatically in the wake of the Global Financial
Crisis, but now it's starting to ease. Our U.S. bank equity
analysts expect that finalization of key capital rules later this
year – an important regulatory step – could free up about [$]5.8
trillion – with a T – of balance sheet capacity across the Global
Systematically Important Banks. In mid-December, the office of
the comptroller of the currency and the FDIC withdrew lending
guidelines from 2013 that had discouraged banks from making loans
to more highly indebted companies.
And just last week, the U.S. administration announced that the
U.S. mortgage agencies, Fannie Mae and Freddie Mac would buy
[$]200 billion of mortgages to hold on their own balance sheet; a
significant move that quickly tightens spreads in this key
market. For investors, we see several implications. This
simultaneous easing across monetary, fiscal, and now regulatory
policy supports a market that runs hot and where valuations may
overshoot.
And in the specific case of these agency mortgages, my colleague
Jay Bacow and our mortgage strategy team think that this shift is
now very quickly in the price. Having previously been positive on
agency mortgage spreads, they've now turned to neutral.
Thank you as always for your time. If you find Thoughts on the
Market useful, let us know by leaving a review wherever you
listen. And also tell a friend or colleague about us today.
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