Welcome to Thoughts on the Market, I'm Matt Hornbach, Global Head of macro strategy

for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll

be talking about global macro trends and how investors can interpret these trends for

rates and currency markets. It's Tuesday, August 3rd, at 8 a.m. in New York.

Are U.S. Treasuries like used cars? That may sound like an offbeat analogy, but let me

explain. Since March, U.S. Treasury yields have fallen to valuations that many believe

are quite rich. In this has many investors naturally wondering if prices will continue

to rise as concern about reduced issuance collides with concern about delayed fed tapering.

So back to the comparison with used cars. In both cases, strong demand and the shortage

of supply have lifted prices higher. Let's start with used car prices. Since last year,

a unique combination of the need for personal transport, a consumer flushed with stimulus

funds and excess savings, semi-conductor shortages in auto industries supply chain constraints

has ultimately meant that car prices, particularly used car prices, have risen at a pace and to

a price level never seen before. And yet, there has always been the inevitability that these

price increases won't be sustainable. As our auto-sequity analyst Adam Jonas has noted,

while these shortages may provide a near-term glow to the auto sector, secular challenges

remain. Use car prices for June showed the first price level decrease in months, suggesting

that we may be nearing an inflection point from the peak level in prices. The lesson here

is that temporary shocks to supply in demand cannot overshadow fundamental drivers forever.

And it's a lesson as applicable to use cars as to treasury yields. Treasury demand from

the Fed for a few more months, or well advertised coupon issuance cuts, can only provide a boost

to treasuries for so long before ultimately the economy in the Fed stands become the primary

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