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.
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.