Buy the dip on five-year US notes, Wall Street majors urge
Two major Wall Street firms are recommending investors start buying five-year US notes after they saw their worst rout since May last week.
Morgan Stanley sees scope for a rebound in Treasuries on expectations data in the coming weeks may surprise to the downside. JPMorgan is suggesting investors buy five-year notes as yields have already climbed to levels last seen in December, though it warned that markets are still too aggressive in pricing for an early start to central bank interest-rate cuts.
“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 US activity data delivered in February.”
Five-year US yields climbed 22 basis points last week, the most since the period to May 19, as traders slashed bets on interest-rate cuts from the Federal Reserve this year. Sustained pushback from central bank officials, along with healthy data on retail sales, sent the odds of a March reduction tumbling to nearly 40% on Friday. The market is now expecting five quarter-point cuts from the Fed this year, after looking for six-to-seven reductions on Jan. 12.
Treasuries advanced modestly on Monday, sending five-year yields down one basis point to 4.04%.
One Japanese investor argued that it’s better to remain cautious on bonds given the potential the Fed leaves rates unchanged this quarter. There could be “concern growing among investors that the Fed may not pivot at all or they have bought too many bonds,” said Hideo Shimomura, a senior portfolio manager at Fivestar Asset Management Co. in Tokyo.
“Don’t be the last guest at the bond party. Once the
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