Time To Buy The Bond Dip? Morgan Stanley, JPM Urge Investors To Capitalize On Treasury Notes Amid Recent Slump

Wall Street’s leading financial institutions, Morgan Stanley and JPMorgan Chase & Co, have suggested that now is the time to invest in U.S. Treasury notes, following a recent slump.

What Happened: Morgan Stanley and JPMorgan are advising investors to consider purchasing five-year U.S. notes, which experienced their most significant decline since May last week, reported Bloomberg on Monday.

Morgan Stanley anticipates a potential rebound in Treasuries. “This is ‘the dip' we have been looking to buy," analysts including Matthew Hornbach, global head of macro strategy at Morgan Stanley, wrote in a note dated Jan. 20. "With less fiscal support and much colder weather, we see downside risks to U.S. activity data delivered in February."

JPMorgan, while acknowledging the recent yield surge, warns that the market is still overly aggressive in its expectations of early central bank interest-rate cuts.

Last week, five-year U.S. yields escalated by 22 basis points, its worst since May 19, as traders cut down bets on interest-rate cuts from the Federal Reserve this year. The market now anticipates five quarter-point cuts from the Fed this year, down from six to seven cuts expected on Jan. 12.

Auctions of Treasury debt, including two-, five- and seven-year notes, are set to commence on Tuesday, which could exert upward pressure on yields.

The first reading of U.S. fourth-quarter gross domestic product on Thursday is expected to reveal the strongest consecutive quarters of growth since 2021. The Federal Reserve’s preferred inflation gauge is due Friday and is projected to indicate the 11th consecutive month of decreasing annual price growth.

While the data may underscore the potential for the Fed to achieve its soft landing aim, Treasuries continue to be rocked by the potential delay and slower pace of an easing cycle. Morgan Stanley envisions at least one rate cut by most central banks by spring in the northern hemisphere.

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Why It Matters: The development came after the renowned investor and “bond king” Bill Gross, in early January, warned about the overvaluation of 10-year U.S. Treasury debt and suggested an alternative in the form of Treasury Inflation-Protected Securities (TIPS).

However, the former senior trader at the New York Fed’s Open Markets Desk, Joseph Wang, predicted that stocks will outperform bonds in the coming years, fueled by government stimulus and a surge in consumer spending.

Vanguard also predicted a strong comeback for bonds following two years of negative returns, attributing the positive turn to the Federal Reserve’s actions.

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