Morgan Stanley Says Stay Long as Global Yields Extend Below 1%

  • Yield on global bond index drops to 0.88%, lowest since April
  • Bonds return 1.3% this month while stock index slumps 8%

Morgan Stanley says bond investors should favor long-term securities after the Federal Reserve acknowledged there are risks for the global economy.

The yield on the Bloomberg Global Developed Sovereign Bond Index dropped to 0.88 percent Wednesday, extending its decline to the lowest level since April. Securities in the gauge have returned 1.3 percent in January. The MSCI All Country World Index of shares has fallen about 8 percent.

The Fed refrained from raising interest rates Wednesday, while the Bank of Japan and European Central Bank may increase their efforts to reduce borrowing costs this year as they seek to boost their economies. The plunge in stocks and crude oil is damping inflation pressures and sending investors to the relative safety of government debt. Long-term bonds, also known as long-duration securities, stand to benefit most if yields fall.

“Stay long,” Matthew Hornbach and Guneet Dhingra at New York-based Morgan Stanley wrote in a report Wednesday. “These central banks will underpin the recent bid for duration as we wait for economic data to underperform consensus expectations.”

‘Closely Monitoring’

“The Committee is closely monitoring global economic and financial developments,” Fed policy makers said in their statement. “Inflation is expected to remain low in the near term, in part because of the further declines in energy prices.” At their previous meeting in December, they increased the benchmark rate for the first time in almost a decade.

ECB President Mario Draghi said this week the region’s central bank has to fulfill its mandate to spur inflation, boosting speculation policy makers will increase stimulus as soon as the next policy meeting in March. The Bank of Japan will probably to add to its own stimulus program this year, though probably not at its meeting Friday, according to economists surveyed by Bloomberg.

Treasury 10-year note yields were little changed at 2.01 percent as of 6:40 a.m. in New York, based on Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 was 102 5/32.

Kei Katayama at Daiwa SB Investments said he’s “slightly bullish” on European bonds and Treasuries.

“All the major central banks are concerned,” which will help ensure they stick to accommodative policies that will help bonds, said Katayama, who helps oversee $48.8 billion for the company as a bond manager in Tokyo.

(Previous versions of this story were corrected to show yields set their low on Wednesday, and to reflect the correct time stamp.)

Before it's here, it's on the Bloomberg Terminal.