Morgan Stanley Turns Bullish on Long Bonds as Equities Upstaged

Morgan Stanley Turns Bullish on Long Bonds as Equities Upstaged

Morgan Stanley Turns Bullish on Long Bonds as Equities UpstagedMorgan Stanley Turns Bullish on Long Bonds as Equities Upstaged

(Bloomberg) — Rate risk at its most benign in over two years is flashing a buy signal for longer-dated U.S. Treasuries, according to Morgan Stanley (NYSE:).

Bank strategists including Matthew Hornbach are advising investors to load up on 10-year Treasury notes amid rising trade tensions, a downturn in equity markets and subdued inflation. The lender is also reiterating its call to buy longer-maturity European bonds and dialing back its recommendation for long-term Japanese debt.

“We turn bullish on duration in the U.S. and suggest investors buy any dip on the back of rebounding equity markets,” the strategists wrote in an April 6 note. “Global bond market duration has not looked this attractive in over two years.”

With a modest acceleration in inflation, the path of U.S. interest rates is likely to undershoot the expectations embedded in longer-maturity Treasuries, according to the bank. Meanwhile, a more protectionist tilt as the U.S. and China lob trade threats is set to light a fire under long bonds that have lagged as stocks have surged.

“Whereas equity market performance was a negative factor for U.S. duration throughout most of the past year, it has now turned into a positive factor,” according to the note.

Duration is a measure of the sensitivity of a bond’s price to changes in interest rates — securities with longer duration typically gain more when rates drop, but suffer stiffer losses when they climb.

The principal risks to Morgan Stanley’s long-duration call include stocks rebounding to all-time highs and a fizzling of trade tensions, according to the strategists.

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