Morgan Stanley Says Bet on Bonds Ahead of Vote; Treasuries Fall

  • Treasuries head for their biggest decline in a month Monday
  • ‘Bonds are too expensive’ after global surge, Mirae’s Li says

Brexit Portfolio: Preparing for the Vote

Morgan Stanley says investors should bet on longer-term bonds ahead of the U.K. vote on whether to leave the European Union.

“We suggest investors remain long duration across developed rate markets into the EU referendum,” Morgan Stanley analysts including Matthew Hornbach, the head of global interest-rate strategy in New York, wrote in a June 17 report. “Rates would fall much further on a vote to Leave than they would rise on a vote to Remain.”

Bonds are moving based on the latest U.K. polls, with Treasuries tumbling the most in a month Monday after two surveys showed respondents favor staying in the EU in the June 23 referendum, curbing demand for the most secure assets. The threat of a Brexit fueled a rush for safety last week that drove bonds to records. Yields in Germany, the U.K., Japan and Australia set all-time lows.

Benchmark U.S. 10-year note yields rose four basis points Monday to 1.65 percent as of 12:20 p.m. in Tokyo, based on Bloomberg Bond Trader data. The price of the 1.625 percent security maturing in May 2026 slid 3/8, or $3.75 per $1,000 face amount, to 99 26/32. The last time the note fell so much was May 18.

Ten-year yields have fallen from almost 2 percent when Morgan Stanley advised clients in March that the global backdrop for debt was so supportive that 2016 may become known as the year of the bull for bonds. The firm is one of the 23 primary dealers, the companies that trade directly with the Fed and underwrite the U.S. debt. Others are starting to grow wary of the surge in debt prices.

“Bonds are too expensive,” said Enna Li, a debt investor in Taipei at Mirae Asset Global Investments Co., which oversees $83 billion worldwide. “Yields will go up this week.” Ten-year yields may climb to 1.70 percent, she said.

For more on the role of central banks as yields fall, click here.

Bonds are trouncing stocks in 2016. The Bloomberg Global Developed Sovereign Bond Index has climbed 11 percent this year. The MSCI All Country World Index of shares has gained 0.7 percent after accounting for reinvested dividends.

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