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Morgan Stanley sees Fed on hold till early 2011

NEW YORK, May 10 (Reuters) - Morgan Stanley now expects the U.S. Federal Reserve will not increase short-term interest rates until early 2011, compared with its earlier forecast for a September rate hike. The U.S. investment bank also downgraded its outlook on the 10-year U.S.

Treasury yield. It now sees the benchmark yield rising to 4.50 percent by year-end, 1 percentage point lower than its previous forecast. "The European sovereign credit crisis, its threat of contagion beyond Europe, and its effect on inflation expectations is the key reason for these significant changes," Morgan Stanley said in research note on Monday. (Reporting by Richard Leong; Editing by Padraic Cassidy) Keywords: USA RATES/MORGANSTANLEY (richard.leong@thomsonreuters.com; Tel: +1 646 223 6313; Reuters Messaging: richard.leong.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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