Two major financial institutions on Wall Street are advising investors to consider buying five-year US notes following their most significant decline since May last week. Morgan Stanley, optimistic about a potential rebound in Treasuries, anticipates that forthcoming data in the coming weeks might surprise on the downside.
Meanwhile, JPMorgan recommends investors acquire five-year notes, highlighting that yields have reached levels not seen since December. However, they caution against overly aggressive market expectations for early central bank interest-rate cuts as Bloomberg reports.
According to analysts, including Matthew Hornbach, the global head of macro strategy at Morgan Stanley, the recent downturn presents an opportune moment to make strategic purchases. They assert, "This is 'the dip' we have been looking to buy," attributing the potential decline in US activity data in February to reduced fiscal support and harsher weather conditions.
The previous week witnessed a notable 22 basis points increase in five-year US yields, the most significant since the period ending on May 19. Traders, responding to diminished expectations of Federal Reserve (Fed) interest-rate cuts this year, drove this surge.
Pushback from central bank officials and positive retail sales data led to a substantial drop in the odds of a March reduction, falling to nearly 40% by the end of the week. Currently, the market foresees five quarter-point cuts from the Fed in the year ahead, compared to initial projections of six-to-seven reductions on January 12.
Upcoming Treasury debt auctions, scheduled to include two-, five-, and seven-year notes starting on Tuesday, may exert upward pressure on yields for these market segments. Simultaneously, the bond market faces uncertainties tied to the first reading of US fourth-quarter gross domestic product on Thursday, expected to showcase the strongest consecutive growth since 2021. The Fed's preferred gauge of underlying inflation, due on Friday, is projected to reveal an 11th consecutive month of diminishing annual price growth.
Analysts suggest that this data may reinforce the possibility of the Fed achieving its stated objective of a soft landing, providing room for interest-rate cuts this year. Despite this, Treasuries are experiencing volatility due to uncertainties regarding the timing and pace of the anticipated easing cycle.
JPMorgan predicts the first Fed cut to occur in June, differing from the fully priced-in May move as per swaps contracts. Morgan Stanley, on the other hand, foresees heightened attention on central banks in both the US and Europe in mid-March, with markets anticipating at least one rate cut by the northern hemisphere spring for most central banks.
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