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Belly a Buy When U.S. 10-Year Yields 2.25%, Morgan Stanley Says

Treasuries investors should purchase five- to 10-year notes if the yield on the benchmark security rises to 2.25 percent in the first quarter, according to Morgan Stanley.

“If yields rise in line with near-term risks in the first quarter of 2013, we intend to change from a defensive stance to a positive stance on the Treasury market,” Matt Hornbach, head of U.S. interest-rate strategy, said in an interview yesterday at Morgan Stanley’s headquarters in New York. “We view this as an opportunity to adopt an overweight stance toward duration with a focus on the intermediate part of the curve.”

Intermediate, or belly, refers to the five- to 10-year maturities on the so-called yield curve, he said.

“The five- to 10-year part offers the most attractive roll down and carry, so we’d prefer those maturities once 10-year yields continue to move higher toward 2.25 percent,” Hornbach said.

Carry is the difference between funding costs and lending rates, while roll-down represents the appreciation from holding a security when the curve is steep.

The yield on the 10-year note touched a 10-month high of 2.058 percent on Feb. 4, dropping today to 1.96 percent, according to Bloomberg Bond Trader prices. Economists in a Bloomberg News survey forecast that the yield will rise to 2.23 percent by the end of the year, in line with Morgan Stanley’s 2013 2.25 percent forecast.

Risk events that may lead to higher yields include the Federal Reserve minutes scheduled for release on Feb. 20 and the announcement in Europe of an emergency three-year loan repayment, part of the longer-term refinancing operations program, on Feb. 22, Hornbach said. Other risks include economic data outperforming expectations until mid-March.

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