Among Wall Street's leading firms, Morgan Stanley and JPMorgan Chase are now advocating for investors to buy short-term treasury notes, following a significant downturn in these securities' performance, the sharpest since May 2023, observed last week.
Morgan Stanley and JPMorgan's Recommendations on Treasure Notes Capitalization After the Recent Sell-off
Morgan Stanley anticipates a potential rebound in Treasury securities in the upcoming weeks. Simultaneously, JPMorgan is recommending the purchase of five-year notes, highlighting their yield surge to levels last seen in December 2023, while cautioning about the highly competitive market conditions amidst speculation about early central bank interest-rate cuts.
In a report dated January 20, Matthew Hornbach, the global head of macro strategy at Morgan Stanley, declared, “This is ‘the dip’ we have been looking to buy.” He further explained that reduced fiscal support and colder weather present downside risks to US economic activity in February.
In the previous week, short-term US yields experienced a surge of 22 basis points, the most substantial increase since the period leading up to May 19, 2023. This rise followed a significant reduction in traders' expectations of interest rate cuts by the Federal Reserve in 2024. Optimism for a rate cut in March diminished to nearly 40% last Friday, influenced by central bank officials' resistance and robust retail sales data. Initially, a six-to-seven cut expectation as of January 12 has been adjusted to anticipate five quarter-point reductions this year.
Treasury Bond Auction Release Dates
The upcoming Treasury bond auction, scheduled for Tuesday, will include two-, five-, and seven-year notes. This event is poised to exert additional pressure on yields in these specific segments of the market.
The initial estimate of the US fourth-quarter gross domestic product, to be released on Thursday, is highly anticipated. It's expected to reflect the strongest back-to-back quarterly growth since 2021, a factor that could significantly impact the debt market.
The release of the Personal Consumption Expenditures (PCE) Price Index, a key inflation measure closely watched by the Federal Reserve, is set for Friday. It's expected to show a continued trend of decelerating annual price growth for the 11th consecutive month.
Potential Consequences on the Economy
This data could bolster the optimism for a 'soft landing' by the Federal Reserve, a scenario where the economy slows enough to curb inflation without triggering a recession. While such an outcome could pave the way for interest rate cuts later this year, the Treasury market remains cautious, factoring in the possibility that any easing cycle may start later and progress more slowly than previously anticipated.
JPMorgan predicts the first Federal Reserve rate cut to occur in June rather than May, as currently fully factored into swap contracts. Meanwhile, Morgan Stanley forecasts central banks in both the US and Europe to focus on policy decisions by mid-March, anticipating that markets will price in at least one rate cut by most central banks by the Northern Hemisphere spring.