Credit availability improving:  Berner says there is no mistaking the improvement in credit availability.  While the credit crunch is not completely over, the credit headwinds to growth are abating.  For example, high-yield issuers have brought $43 billion to market year-to-date, compared with $11 billion for the same period last year.  And the winding down of the Term Asset-Backed Securities Lending Facility (TALF) is a good sign that the ABS (Asset-Backed Securities) market can function on its own, with the final tranche of loans collateralized by eligible newly issued and legacy ABS scheduled to be accepted on March 31, 2010.

The economist says despite these improvements, banks remain relatively reluctant to lend, and access to credit for households and small businesses is still somewhat impaired.  The Fed's Senior Loan Officer Survey indicates that banks were still tightening lending standards in January, but at a slower pace.  While that seems ominous, it's pace that matters for growth.  Tight lending standards are still depressing the level of lending and thus output, but their effect on growth is abating.  MS finds that every 10-point drop in the proportion of banks tightening standards recently allows a 1pp increase in bank lending growth.  Moreover, the net percentage of loan officers willing to lend to consumers moved into positive territory for the first time in 2.5 years, and to a four-year high.  Finally, the NFIB (National Federation of Independent Business) small business poll showed that credit was slightly easier to obtain in February for the first time since the recession began.

New era for households does not mean no borrowing:  Richard Berner says American consumers have begun what looks like a long process of deleveraging their balance sheets and rebuilding saving, aimed at restoring a more sustainable balance between household debt and the ability to carry it.  One measure of sustainability is the debt service ratio - - household payments of interest and principal on debt in relation to disposable income.  By that metric, courtesy in part of lower interest rates and MS' expectations for a further recovery in income, consumers are already about halfway through the process. MS says it believes that 11-12% is a sustainable debt-service ratio, consistent with debt/income of 80-100%; the former metric is halfway there, while the latter has some way to go. 

Correspondingly, Berner says it's a new era for American consumers, one of rising thrift and moderate growth in consumer spending.  Consumer deleveraging likely will continue into at least the summer as debt paydowns and write-downs exceed new originations.  Soon after that, MS believes that consumer borrowing - - including consumer credit and mortgages - - will begin to grow, although much more slowly than income.  Indeed, consumer credit turned up in January after declining for 15 of the previous 17 months; it's too soon to argue that those data represent a turn higher, but they hint at stability.  In the view of MS, even stability in consumer borrowing following the unprecedented bust of the past two years will change the supply-demand balance in credit markets. 

Corporate financing inflection point arrives:  In contrast with the languid turn in consumer borrowing, corporate borrowing likely will turn up much more quickly for three reasons.  First, corporate balance sheets were not the problem in this recession; by and large, debt/EBITA has been subdued.  Of course, the ratio rose in recession, but it is quickly falling as earnings bounce back.  Second, corporate access to funds in the aggregate has improved faster than for consumers.  Finally, and most fundamentally, corporate external financing needs are likely to turn positive soon as companies turn from inventory liquidation to accumulation, as capital spending begins to recover, and as the growth in corporate cash flow inevitably slows.  The combination of these developments is likely to boost corporate credit demands, perhaps sooner than expected.

Treasury financing update: MS expects that the Treasury will issue $2.4 trillion in coupon securities in the current fiscal year.  The budget deficit will likely be slightly lower this year than last, and overall Treasury financing needs more so.  But the duration of Treasury issuance this year will be much higher than last, driven by the Treasury's effort to reverse the significant shortening in the average maturity of the debt seen in 2008 and 2009, when huge increases in T-bill issuance funded much of the initial spike in the budget deficit.  Richard Berner says while the debt managers said at the February refunding that coupon sizes have peaked and could be reduced later in the year, at current record levels, net coupon issuance remains enormous at each mid-month and end-of-month settlement of biweekly auctions, and this is being offset by sizable net bill paydowns.  Even if supply is pared a bit in coming months, gross coupon issuance is likely to be nearly a third bigger in fiscal 2010 than it was in fiscal 2009, when it was already a record by a very wide margin. 

Supply-demand balance points to higher yields:  Treasury yields have remained low partly as there has been little competition from private borrowers.  Competition is coming, even in a moderate recovery.  With growing concerns about the sustainability of US fiscal policy, Morgan Stanley expects that shift will promote significant increases in real yields this year.

A look at the shifting vote on health care and the bipartisan passage of the Senate's job bill, with CNBC's John Harwood: