Investors could be in store for some surprises next year, according to investment bank Morgan Stanley, which says yields on two and 10-year Treasurys could end 2014 at 2 percent in two different extreme scenarios.
Many analysts expect benchmark 10-year yields, which have spiked over 100 basis points this year on talk of Federal Reserve tapering, to head higher from current levels around 2.85 percent. Two-year yields, currently at 0.33 percent, are expected to stay low as interest-rate hike expectations stay muted.
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Morgan Stanley's base case is for yields on 10-year notes to end 2014 at 3.45 percent and for 2-year note yields to be trading at 1.15 percent.
But in two scenarios designed to capture the more extreme risks to the market, Morgan Stanley analysts said investors could be caught off guard if U.S. economic growth either disappoints or is much stronger than expected.