Following the recent significant sell-off in five-year US notes, major Wall Street firms, Morgan Stanley and JPMorgan, are advising investors to consider buying the dip. While Morgan Stanley anticipates a rebound in Treasuries, JPMorgan recommends purchasing five-year notes, pointing out that yields have reached levels last seen in December. Both firms acknowledge the markets’ aggressive stance in pricing for early central bank interest-rate cuts.
Key Points:
- Reasons for Buying the Dip:
- Morgan Stanley sees the recent sell-off as an opportunity to buy, emphasizing potential downside risks to US activity data in February due to less fiscal support and colder weather.
- Analysts, including Matthew Hornbach, global head of macro strategy at Morgan Stanley, expressed optimism, stating, “This is ‘the dip’ we have been looking to buy.”
- Yield Movement:
- Five-year US yields experienced a notable climb of 22 basis points last week, marking the most significant increase since May 19.
- JPMorgan suggests investors buy five-year notes as yields have already risen to levels observed in December.
- Market Sentiment on Rate Cuts:
- The sell-off in Treasuries resulted from reduced expectations of interest-rate cuts by the Federal Reserve in 2024.
- The odds of a March rate reduction fell to nearly 40% on Friday, with the market now expecting five quarter-point cuts for the year, down from initial expectations of six-to-seven reductions.
- Market Caution:
- Some caution is advised, with a Japanese investor highlighting concerns that the Fed may not pivot on rates this quarter. There’s a growing perception that investors may have purchased too many bonds.
- Hideo Shimomura, a senior portfolio manager at Fivestar Asset Management Co. in Tokyo, advises caution, stating, “Don’t be the last guest at the bond party. Once the party is over, leave the room quickly.”
- Upcoming Auctions and Risks:
- The upcoming auctions of Treasury debt, including two-, five-, and seven-year notes, may exert upward pressure on yields.
- The bond market faces potential risks with the release of the first reading of US fourth-quarter GDP on Thursday and the Fed’s preferred gauge of underlying inflation on Friday.
- Interest Rate Cut Expectations:
- JPMorgan expects the first Fed rate cut to occur in June, contrary to the fully priced-in May move according to swaps contracts.
- Morgan Stanley foresees central banks in both the US and Europe to be in focus in mid-March, with markets expected to price in at least one rate cut by spring for most central banks.
As market dynamics evolve, investors will closely monitor economic data releases and central bank decisions for signals on the trajectory of interest rates and market conditions.
