Morgan Stanley and JPMorgan are advising investors to consider purchasing five-year US notes following their most significant decline since May last week.
“This is ‘the dip’ we have been looking to buy,” analysts at Morgan Stanley, including Matthew Hornbach, noted on Jan. 20. They foresee a potential rebound in Treasuries due to expectations that forthcoming data may reveal downside surprises. However, JPMorgan warns that markets are overly aggressive in anticipating early central bank interest-rate cuts.
“With less fiscal support and much colder weather, we see downside risks to US activity data delivered in February,” the analysts added.
Last week, five-year US yields rose by 22 basis points, the most since May 19, prompting traders to reduce bets on Federal Reserve rate cuts this year. The market is currently anticipating five quarter-point cuts from the Fed in 2024.
Upcoming Treasury debt auctions, including two-, five-, and seven-year notes, may exert upward pressure on yields. Additionally, potential risks for the bond market include the US fourth-quarter GDP reading on Thursday and the Fed’s preferred gauge of underlying inflation on Friday.
JPMorgan anticipates the first Fed cut in June, contrary to the fully priced-in May move. Morgan Stanley sees central banks in the US and Europe drawing attention in mid-March, with markets pricing in at least one rate cut for most central banks by northern hemisphere spring.
