Morgan takes on Goldman with bullish bond call

Treasury bonds' bear market is over and yield curve will continue to flatten, analysts say

Feb 26, 2018 @ 11:32 am

By Bloomberg News

Morgan Stanley says it's time to get bullish on bonds — even as Goldman Sachs Group and Warren Buffett issue warnings.

The sell-off in Treasuries, which began in earnest in September and ramped up in January, is ending, according to Morgan Stanley strategists. Not so for Goldman Sachs Group, which is running its models through a scenario in which yields on 10-year notes hit 4.5% — though it expects that number to be closer to 3.25% by the end of this year. Meanwhile, Warren Buffett cautioned over the weekend that bonds can lift risk levels in portfolios as inflation eats away at returns.

There's a lot at stake following the six-month rout in the $14 trillion U.S. government bond market that helped trigger jitters in global equities after years of gains. While record levels of short positioning in Treasury futures may augur the next leg down as the risk premium for holding longer-dated notes climbs, it's far from a given that tighter U.S. monetary policy will drive ever higher yields after an almost 1 percentage point jump in the 10-year yield.

"We think the bell has tolled for the best of the bear market in longer-duration bonds," wrote the Morgan Stanley team, led by Matthew Hornbach, global head of interest-rates strategy. "We like the long end."

After U.S. economic growth picked up last year and with the Fed looking more determined to stick to its tightening path now, comments from Fed Chairman Jerome Powell during his first public speeches since taking over from Janet Yellen will be closely scrutinized this week.

Bond-market veteran Bill Gross has said that a mild bear market in bonds was confirmed last month, and Ray Dalio, manager of the world's largest hedge fund, says the bull run seen over the past 30 years is over.

The value for Morgan Stanley is buying bonds at the long end of the Treasury curve. Mr. Hornbach's team advised maintaining an existing bet that the gap between two-year notes and 30-year Treasuries will narrow from its current level of about 92 basis points, according to the report on Saturday.

Mr. Hornbach called 2016 the year of the bull for bonds and was vindicated when yields fell to record lows four months later. Yet 10-year yields failed to push as low as his forecast for 1%.


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