MS Matthew Hornbach - The Real Drivers of the US Treasury Bond Market Routpdf
MS Matthew Hornbach - The Real Drivers of the US Treasury Bond Market Routpdf
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  1. M IdeaGlobal Macro Strategy | North AmericaThe Real Drivers of the US Treasury Bond Market RoutMorgan Stanley & Co. LLCMatthew HornbachStrategistMatthew.Hornbach@morganstanley.com+1 212 761-1837Guneet Dhingra, CFAStrategistGuneet.Dhingra@morganstanley.com+1 212 761-1445Explanations for the recent US Treasury curve bear-steepening and increased term premiums include technical and fundamental factors. The FOMC rarely enters the discussion - specifically, its reactions to data and subsequent forward guidance, both of which we think explain the majority of the rout. Bottom line: Without the Fed's more hawkish reaction function to recent growth and inflation data, in the context of a deeply inverted yield curve; other technical and fundamental drivers would not have contributed that much to higher Treasury yields, in our view.Supporting evidence: The entire move higher in Treasury yields since July occurred in real yields, and a majority of the 2s10s bear-steepening occurred along the real yield curve. If stronger-than-expected growth drove real yields higher, without a hawkish reaction from the Fed, then we would expect to see breakeven inflation rates move higher as well. We also would expect fiscal sustainability concerns to put upward pressure on breakeven inflation rates. But that didn't happen.Supply falls flat: If the supply of US Treasury duration drove the yield curve steeper, we would expect to see nominal Treasuries substantially underperform overnight index swaps (OIS) that tie directly to the effective fed funds rate - especially in longer maturities/tenors, i.e., we would expect the UST-OIS spread curve to steepen. But that didn't happen either.Important context: Reasons to downplay the Fed miss important context: namely, the inversion of the yield curve. Since 1981, yield curve inversion between the effective fed funds rate and 10y yields occurred less than 13% of the time. Given its rarity, investors need to think differently when seeking to explain movements in yields, curve shapes, or term premiums.The yield curve upside down: Investors should juxtapose the inverted yield curve today with the periods when the curve began at the effective lower bound, 0.00-0.25%. At that time, the Fed impacted yield curve shape with its forward guidance about interest rate and balance sheet policy. When Fed guidance turned hawkish, the yield curve would bear-steepen, instead of the more traditional bear-flattening, and term premiums would expand.Reasons to buy or sell: In spite of the negative carry that comes with an inverted yield curve, investors still might buy Treasury notes and bonds for a few reasons (detailed within). However, the Fed's reaction to economic data and consequent forward guidance negated each reason to buy and, instead, provided reasons to sell: the risk of more and longer-lasting negative carry.Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.October 16, 2023 07:13 AM GMT
  2. M Idea2Global Macro StrategyMORGAN STANLEY & CO. LLCMatthew HornbachMatthew.Hornbach@morganstanley.com+1 212 761-1837Guneet Dhingra, CFAGuneet.Dhingra@morganstanley.com+1 212 761-1445Consensus Explanations Miss Important Facts, ContextOften cited explanations for the recent Treasury market sell-off, bear-steepening of the yield curve, and expansion of term premiums include: •Technical drivers, like US Treasury market supply, investor positioning adjustments, CTA selling, and agency MBS-related negative convexity flows. •Fundamental drivers, like fiscal sustainability concerns, Bank of Japan policy changes, and stronger-than-expected growth.Rarely does the Federal Reserve and how it reacted to economic data enter the discussion. And yet, we think that without the Fed's more hawkish reaction function to recent growth and inflation data, in the context of a deeply inverted yield curve; other technical and fundamental drivers would not have contributed that much to higher Treasury yields. So why does the Fed get discounted in these discussions? Two reasons:1. The New York Fed's ACM model suggests that the entirety of the move since July came from term premiums expanding (see Exhibit 1). Analysts feel more comfortable pinning bond market moves on the Fed when rate expectations drive them, not when term premiums dominate (see Exhibit 2).2. The Treasury curve bear-steepened, i.e., 10y yields rose more than 2y yields (see Exhibit 3). Typically, the yield curve bull-steepens or bear-flattens when expectations or risk premiums related to Fed policy change.Exhibit 1:UST 10y yield and ACM 10y term premium (5-day moving averages)-1.40-1.20-1.00-0.80-0.60-0.40-0.200.000.200.403.353.553.753.954.154.354.554.75Jan Feb Mar Apr May Jun Jul Aug Sep OctUST 10y yieldACM 10y TP (rhs)%%Source: Morgan Stanley Research, FRB New York, BloombergExhibit 2:UST 10y yield and ACM 10y rate expectation (5-day moving averages)4.004.204.404.604.805.005.205.405.603.353.553.753.954.154.354.554.75JanFebMar Apr May Jun Jul Aug Sep OctUST 10y yieldACM 10y RE (rhs)%%Source: Morgan Stanley Research, FRB New York, Bloomberg
  3. M IdeaMorgan Stanley Research3Exhibit 3:UST 10y yield and UST 2s10s yield curve (5-day moving averages)-1.3-1.2-1.1-1.0-0.9-0.8-0.7-0.6-0.5-0.4-0.3-0.23.33.53.73.94.14.34.54.74.9Jan Feb Mar Apr May Jun Jul Aug Sep OctUST 10y yieldUST 2s10s curve (rhs)%%Source: Morgan Stanley Research, Federal Reserve, BloombergExhibit 4:UST 2s10s yield curve and TIPS 2s10s yield curve* (5-day moving averages)-1.3-1.1-0.9-0.7-0.5-0.3-0.1-1.3-1.2-1.1-1.0-0.9-0.8-0.7-0.6-0.5-0.4-0.3-0.2Jan Feb Mar Apr May Jun Jul Aug Sep OctUST 2s10s curveTIPS 2s10s seasonally-adj (rhs)%%Source: Morgan Stanley Research, Federal Reserve, Bloomberg * We seasonally-adjust TIPS yieldsThese two reasons to discount the Fed miss important counterpoints. For example, the majority of the 2s10s bear-steepening occurred along the real yield curve (see Exhibit 4). In fact, the entire move higher in Treasury yields since July occurred in real yields (see Exhibit 5). 10y yields rose 75bp since July, while 10y breakeven inflation rates moved sideways (see Exhibit 6). Exhibit 5:UST 10y yield and TIPS 10y yield* (5-day moving averages)1.01.21.41.61.82.02.22.42.63.23.43.63.84.04.24.44.64.85.0Jan FebMarApr May Jun Jul Aug Sep OctUST 10y yieldTIPS 10y seasonally-adjusted (rhs)%%Source: Morgan Stanley Research, Federal Reserve, Bloomberg * We seasonally-adjust TIPS yieldsExhibit 6:UST 10y yield and TIPS 10y breakeven inflation* (5-day moving averages)2.02.12.22.32.42.52.62.72.83.23.43.63.84.04.24.44.64.85.0JanFebMar Apr May Jun Jul Aug Sep OctUST 10y yieldBEI 10y seasonally-adjusted (rhs)%%Source: Morgan Stanley Research, Federal Reserve, Bloomberg * We seasonally-adjust TIPS yieldsWhy would real yields move higher without higher breakeven inflation rates? A more hawkish Fed could explain such a move. If stronger-than-expected growth drove real yields higher, without a hawkish reaction from the Fed, then we would expect to see breakeven inflation rates move higher as well. After all, stronger growth could bring higher inflation, if the Fed sat on its hands.
  4. M Idea4In addition, if Treasury supply or fiscal sustainability concerns drove the yield curve to bear-steepen, we would expect to see nominal Treasury yields rise relative to TIPS real yields, i.e., breakeven inflation rates rise. We would also expect to see nominal Treasuries substantially underperform overnight index swaps (OIS) that tie directly to the effective fed funds rate - especially in longer maturities/tenors. •As Exhibit 7 shows, 10y Treasuries did underperform 10y OIS rates since July. But 10y Treasury yields only rose 5bp more than 10y OIS rates, which rose 70bp. •Further, the 2s10s UST-OIS spread curve didn't steepen - meaning that 10y Treasuries didn't underperform 10y OIS rates by more than 2y Treasuries underperformed 2y OIS rates - something we would expect if the supply of Treasury duration drove the move (see Exhibit 8).Exhibit 7:UST 10y yield and UST-OIS 10y swap spread (5-day moving average)22242628303234363.353.553.753.954.154.354.554.75JanFebMar Apr May Jun Jul Aug Sep OctUST 10y yieldUST-OIS 10y (rhs)%Basis pointsSource: Morgan Stanley Research, Federal Reserve, Bloomberg Exhibit 8:UST 2s10s curve and UST-OIS 2s10s spread curve (5-day moving average)812162024283236404448-1.3-1.2-1.1-1.0-0.9-0.8-0.7-0.6-0.5-0.4-0.3-0.2Jan Feb Mar AprMayJun Jul Aug Sep OctUST 2s10s curveUST-OIS 2s10s spread curve (rhs)%Basis pointsSource: Morgan Stanley Research, Federal Reserve, Bloomberg The important context not to miss: the inversion of the yield curveReasons to downplay the Fed also miss important context: namely, the inversion of the yield curve. The curve between the effective fed funds rate and 10y or 30y yields inverted in November 2022 and remains inverted today. In May 2023, both curves reached levels of inversion seen only a handful of times in the last 40 years (see Exhibit 9).Since 1981, curve inversion between effective fed funds and 10y yields or 30y yields occurred less than 13% and 10% of the time, respectively (see Exhibit 10). Given the rarity of an inverted yield curve, investors need to think differently when seeking to explain movements in yields, curve shapes, or term premiums.Investors should juxtapose the inverted yield curve today with the periods when the curve began at the effective lower bound, 0.00-0.25%. During the period from 2008-2015 and again from 2020 to 2022, the Fed impacted yield curve shape with its forward guidance about interest rate and balance sheet policy. When Fed guidance turned hawkish, the yield curve would bear-steepen, instead of the more traditional bear-flattening, and term premiums would expand.
  5. M IdeaMorgan Stanley Research5Exhibit 9:Target fed funds rate vs. 10y and 30y yield curve history-2-1012345'81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 '20 '23Effective fed funds vs. 10y (5DMA)vs. 30y (5DMA)%<0= negative carry>0= positive carrySource: Morgan Stanley Research, Federal Reserve, BloombergExhibit 10:Target fed funds rate vs. 10y and 30y yield curve cumulative distribution function0102030405060708090100-2-10 1 2 3 4 5Effective fed funds vs. 10y (CDF)vs. 30y (CDF)%<0 = invertedSource: Morgan Stanley Research, Federal Reserve, Bloomberg•Consider the following scenario. Assume the Fed guides investors to expect the target fed funds rate range would remain at 5.25-5.50% for the next year, with risks skewed to lower rates at some point. Further, assume that before investors receive this guidance, the 10y yield traded at 7.0%. Would investors more likely buy 10y notes or sell 10y notes with a yield ~150bp above the overnight rate? We think the marginal investor would buy.•Now, consider a similar scenario, where the Fed guides investors to expect the same target fed funds rate range (5.25-5.50%) for the next year, but suggests that risks skew to higher rates at some point. In addition, assume that before investors receive this guidance, the 10y yield traded at 4.00%, or ~150bp below the overnight rate. Would the marginal investor more likely buy or sell? We know the marginal investor would sell.In fact, the later scenario played out 4 weeks ago when the Fed convened in mid-September. The Fed's dot-plot suggested a majority of FOMC participants thought another rate hike might be appropriate, and that the higher policy rate would be in place for a longer period than previous dot-plot suggested.The main difference in these two scenarios is the shape of the yield curve. With an inverted yield curve, a levered investor incurs a running cost to own the bond at a yield below the financing rate, i.e., negative carry. A real money investor incurs an opportunity cost to invest beyond a short maturity T-bill or note. The longer the curve remains inverted, the longer these investors pay the price and the costlier ownership becomes.•Why is the yield curve inverted in the first place? When Fed raised rates to levels consistent with the 2006 hiking cycle, the yield curve flattened, just as it did back then. But the curve started the recent hiking cycle 100bp flatter than in 2004, and ended 100bp flatter than in 2006 (see Exhibit 11). •The stock effect of the Fed's previous Large Scale Asset Purchases (LSAPs) explains the flatter starting point for the curve and why the yield curve remains inverted today (see Exhibit 12). The yield curve should remain flatter for a given fed funds rate than before, as long as the SOMA holds a greater stock of duration.
  6. M Idea6Exhibit 11:Target fed funds rate and UST 2s10s yield curve0123456-1.0-0.50.00.51.01.52.02.53.0'03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23UST 2s10s curveTarget fed funds rate (rhs)%%Source: Morgan Stanley Research, US Treasury, Federal ReserveExhibit 12:Target fed funds rate and System Open Market Account (SOMA) holdings % of outstanding01234561012141618202224262830'03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23Notes/Bonds/TIPS: SOMA as % of outstandingTarget fed funds rate (rhs)%%Source: Morgan Stanley Research, US Treasury, Federal ReserveA Few Reasons to Buy Despite an Inverted Yield CurveIn spite of the negative carry that comes with an inverted yield curve, investors still might buy Treasury notes and bonds for a few reasons:1. Investors might think of the Treasury note or bond as insurance against riskier investments in their portfolio, and they might be willing to pay the premium (negative carry) for that insurance.2. Investors might think the Treasury note or bond will provide enough capital gain to offset the negative carrying cost, i.e., the yield on the bond will fall.3. Investors might not think the Treasury note or bond will remain as negative carry for much longer, i.e., either the financing rate will fall within their investment horizon, or markets will price it to fall. Our former view to own 5y US Treasuries levered all 3 of those reasons at different times during the year. However, the Fed's reaction to economic data and consequent forward guidance negated each reason to buy and, instead, provided reasons to sell: the risk of more and longer-lasting negative carry.Insurance against riskier investments in the portfolioOur US equity strategists projected negative returns on stocks throughout most of the year, but sustained drawdowns on market-capitalization-weighted indexes did not occur. Even so, when temporary drawdowns occurred, US Treasuries did not act as a hedge against them anyway. Over the past 2 decades, US Treasury returns consistently correlated negatively to US stock returns or US high-yield credit returns. So when equities or high-yield credit prices decreased, Treasuries prices increased. However, over the past year, US Treasury returns correlated positively to riskier asset returns (see Exhibit 13).
  7. M IdeaMorgan Stanley Research7As the nature of Treasury market returns changed this year, investors increasingly avoided buying Treasuries to protect other parts of their portfolios. In addition, riskier assets performed reasonably well year-to-date - reducing the perceived need for a hedging vehicle like US Treasuries.Why did these correlations change? Over the past 25 years, US Treasury returns correlated less negatively to equity returns as the Fed raised rates. Hawkish forward guidance from the Fed also made correlations less negative, e.g., during the 2013 "taper tantrum" (see Exhibit 14). Exhibit 13:52-week rolling weekly return correlation between US Treasury index total returns and S&P 500 index/US high-yield credit index total returns2856-80-60-40-20020406080'99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23UST vs. S&P 500UST vs. US HY%>0= USTs don't hedge risky assets<0= USTs hedge risky assetsSource: Morgan Stanley Research, BloombergExhibit 14:52-week rolling weekly return correlation between US Treasury index total returns and S&P 500 index total returns vs. target fed funds rate01234567-80-70-60-50-40-30-20-1001020304050'99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23UST vs. S&P 500Target fed funds rate (rhs)%%"Taper tantrum"Source: Morgan Stanley Research, Federal Reserve, BloombergEnough capital gain to offset the negative carrying costWe suggested investors get long 5y Treasuries three times in 2023 (see Exhibit 15), in spite of the negative carry. Elevated realized volatility in the marketplace reduced the cost of the negative carry and allowed more nimble investors to trade Treasuries from the long side, without locking in the negative carry every day (see Exhibit 16).First, we suggested investors buy in early January, after the ISM services report for December fell dramatically from 56.5 to 49.6 and much further than consensus projected (55.0). •Despite the move to new yield lows since September 2022, 5y yields subsequently stabilized ahead of the nonfarm payroll report for January, which included benchmark revisions for the prior year. Upon seeing total nonfarm payrolls surprise to the upside in early February alongside significant upward revisions to prior months, we suggested investors exit the position.Second, we suggested investors buy 5y Treasuries in mid-April, in the wake of the first wave of regional banking stress. While uncertainty about the outlook ran high, we thought the risk-reward favored owning the Treasury market near where we exited the trade in early February.
  8. M Idea8•Despite 5y yields subsequently falling to new lows on the year, upside surprises to nonfarm payrolls and retail sales for April took yields to our reassessment level, where we exited. A hawkish dot-plot at the June FOMC meeting followed another strong nonfarm payroll report for May - sending yields even higher. Third, at the end of June, our US economists added a July FOMC rate hike to their expected path, with yields nearing pre-regional banking crisis highs. Then, in early July, in the wake of a weaker-than-expected nonfarm payroll report for June, we suggested investors buy 5y Treasuries again. •Despite the immediate move to lower yields on the back of weaker-than-expected CPI report; a stronger-than-expected retail sales report and large upward revisions to 2Q real GDP in mid-July began the move higher in yields. •Hawkish rhetoric from FOMC participants ultimately concluded in them revising higher both growth and policy rate projections at the September meeting. The median 2023 dot included another 25bp hike and the median 2024 dot removed 50bp of cuts, which took 5y yields to our reassessment level where we suggested investor exit the position.Exhibit 15:US Treasury 5y note yield in 2023 and our trading suggestions4.643.253.503.754.004.254.504.75JanFebMarAprMayJun Jul Aug Sep OctUST 5y yield%BuyExitBuyStopBuyStopSource: Morgan Stanley Research, BloombergExhibit 16:1y rolldown on 1y5y USD OIS rate: outright and adjusted for realized volatility*-20-27-50-45-40-35-30-25-20-15JanFebMar Apr May Jun Jul Aug Sep Oct1y rolldown on 1y5y USD OIS rate (5DMA)Realized vol-adjusted 1y rolldown (5DMA)Basis points runningSource: Morgan Stanley Research, Federal Reserve Note: *Realized volatility calculated on daily changes over the past 252 trading days, then annualizedThe negative carry will diminish or become positiveFor the negative carry of a bond to diminish, either bond yields need to rise relative to their financing rates - which is what has happened more recently - or financing rates need to fall relative to bond yields. The Fed controls financing rates with its monetary policy settings. So, investors might buy a negative carry bond today because they think that, during their investment horizon, either: 1. The Fed might make the bond less negative carry by lowering policy rates; or 2. The market may price a greater risk of the Fed lowering policy rates.
  9. M IdeaMorgan Stanley Research9While our economists didn’t see the Fed cutting this year, they had the Fed cutting in March 2024 (and still do). The first two times we suggested investors buy 5y Treasuries, our economists thought the Fed would be done hiking in May. Instead, the Fed hiked again in July.In addition, since March, the Fed guided toward a higher peak policy rate in each of its Summary of Economic Projections (SEP) updates. In June and September, the Fed guided toward a higher peak rate at the 1-year forward horizon. And in September, the Fed guided toward a higher rate at the 2-year forward horizon (see Exhibit 17).The Fed's September dot-plot signals a peak policy rate 25bp above what our economists currently expect, and suggests that rate cuts won’t begin until 4Q24 - a full two quarters after our economists expect the Fed to begin cutting rates (1Q24). In fact, the Fed's projections for policy rates 2 years ahead increasingly diverge from market participant expectations as well (see Exhibit 18).The Fed doesn't want investors to interpret its projections as guidance, but investors do anyway. As such, the dot-plot increasingly suggests that negative carrying Treasuries may remain negative carry for a lot longer than expected previously.If investors increasingly interpret the Fed's dot-plot as the primary risk to their own expectations, then investors will demand more risk premium - especially if Treasuries carry negatively. This idea alone perfectly explains why Treasury yields rose, the yield curve steepened, and term premiums expanded - while rate expectations remained stable.Exhibit 17:FOMC participant median projected appropriate policy rate 1y and 2y ahead: from the interpolated Summary of Economic Projections (SEP) dot-plot4.615.134.975.185.314.124.184.134.074.234.04.24.44.64.85.05.25.4Sep-22 Dec-22 Mar-23 Jun-23 Sep-231y ahead2y ahead%Source: Morgan Stanley Research, Federal ReserveExhibit 18:FOMC participant median projected appropriate policy rate vs. market participant median projected policy rate 2y ahead: from the interpolated SEP and Survey of Market Participants (SMP)0.00.51.01.52.02.53.03.54.04.55.0'14 '15 '16 '17 '18 '19 '20 '21 '22 '23FOMC participant target fed tunds rate 2y aheadMarket participant target fed funds rate 2y ahead%?Source: Morgan Stanley Research, FRB New York, Federal Reserve
  10. M Idea10Global Macro Strategy TeamMORGAN STANLEY & CO. LLCMatthew Hornbach, CMTMatthew.Hornbach@morganstanley.comGlobal Head of Macro Strategy+1 212 761-1837Guneet Dhingra, CFAGuneet.Dhingra@morganstanley.comHead of US Rates Strategy+1 212 761-1445Efrain Tejeda, CFAUS Rates Strategist+1 212 761-3529Martin Tobias, CFA, CMTUS Rates Strategist+1 212 761-6076Francesco GrechiUS Rates Strategist+1 212 761-1009Allen LiuUS Rates Strategist+1 212 761-6049MORGAN STANLEY & CO. LLCAndrew WatrousG10 FX Strategist+1 212 761-5287Zoe K. StraussG10 FX Strategist+1 212 761-0407Simon WaeverSimon.Waever@morganstanley.comHead of EM Sovereign Credit and Latin America Fixed Income Strategy+1 212 296-8101Ioana ZamfirLatin America Macro Strategist+1 212 761-4012Emma CerdaLatin America Sovereign Credit+1 212 761-2344Eli CarterLatin America Macro Strategist+1 212 761-4703MORGAN STANLEY & CO. INTERNATIONAL PLCJames K. LordJames.Lord@morganstanley.comGlobal Head of FXEM Strategy+44 20 7677-3254Eric OynoyanEric.Oynoyan@morganstanley.comHead of European Rates Strategy+44 20 7425-1945Lorenzo TestaEuropean Rates Strategist+44 20 7677-0337Fabio BassaninUK Rates Strategist+44 20 7425-1869Marie-Anais FrancoisEuropean Rates Strategist+44 20 7425-1877David S. Adams, CFADavid.S.Adams@morganstanley.comHead of G10 FX Strategy+44 20 7425-3518Wanting LowG10 FX Strategist+44 20 7425-6841Dominic KrummenacherG10 FX Strategist+44 20 7425-9781Neville MandimikaCEEMEA Sovereign Credit Strategist+44 20 7425-2509Pascal BodeEM Sovereign Credit Strategist+44 20 7425-3282MORGAN STANLEY ASIA LIMITED+Min Dai, CFAMin.Dai@morganstanley.comHead of AXJ Macro Strategy+852 2239-7983Gek Teng KhooAXJ Macro Strategist+852 3963-0303MORGAN STANLEY MUFG SECURITIES CO., LTD.Koichi SugisakiKoichi.Sugisaki@morganstanley.comHead of Japan Macro Strategy+81 3 6836-8428
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  12. M Idea12Analyst Stock RatingsOverweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.Analyst Industry ViewsAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.Important Disclosures for Morgan Stanley Smith Barney LLC & E*TRADE Securities LLC CustomersImportant disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at www.morganstanley.com/online/researchdisclosures. 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