Morgan Stanley Bond Bulls Who Called Brexit Rally Turn Neutral

  • Bank shifts view as U.S., U.K., Germany, Japan yields set lows
  • Treasuries decline after 30-year yield sinks to record

How to Invest When Bonds Are Priced to Perfection

Morgan Stanley, which advised investors to bet on bonds before the U.K.’s vote to leave the European Union sent global debt markets surging, is cooling toward government securities.

The bank revised its outlook after yields in the so-called Group of Four -- the U.S., Japan, Germany and the U.K. -- plunged to records last week. Morgan Stanley, one of the 23 primary dealers that underwrite the U.S. debt, is echoing investor Bill Gross in advising caution following the rally. Ten-year Treasuries fell Monday, while 30-year securities were little changed, after yields on both securities reached record lows on Friday.

“After having been bullish, we turn neutral on bonds as G4 yields sit at all-time lows,” Morgan Stanley analysts including Matthew Hornbach, the head of global interest-rate strategy in New York, wrote in a report July 8.

The benchmark U.S. 10-year note yield rose five basis points, or 0.05 percentage point, to 1.41 percent as of 11:18 a.m. in New York, according to Bloomberg Bond Trader data. It touched an all-time low of 1.318 percent on July 6. The 1.625 percent security due in May 2026 fell 15/32, or $4.69 per $1,000 face amount, to 101 31/32.

Thirty-year bond yields rose three basis points to 2.13 percent, after setting their own low of 2.0882 percent earlier Monday.

For more on the outlook for Treasury yields, click here.

Bonds fell after Japan Prime Minister Shinzo Abe outlined plans to spur his nation’s economy, said Kazuaki Oh’E, the head of fixed income at CIBC World Markets Japan Inc. in Tokyo. A fiscal-stimulus plan would curb demand for the relative safety of debt.

Beating Stocks

In June, Hornbach and his group advised investors to hold long-duration securities in developed debt ahead of the June 23 Brexit vote. The Bloomberg Global Developed Sovereign Bond Index has jumped 2.2 percent since then, more than double the returns from the S&P 500 Index. Duration is a measure of a bond’s sensitivity to changes in yield, and a longer position reflects a more bullish view.

“The sovereign bonds are not up my alley,” Gross, who built the world’s biggest bond fund at Pacific Investment Management Co. and is now at Denver-based Janus Capital Group Inc., said on Bloomberg Television last week. “It’s too risky.”

Low yields mean bonds are especially vulnerable because a small increase can bring a large decline in price, he said.

‘Too Expensive’

The European Central Bank will probably add to its stimulus measures when it meets July 21, said Enna Li, a debt investor in Taipei at Mirae Asset Global Investments Co. While that may extend the rally, it would also mark a bottom for global bond yields, including those on Treasuries, according to her. Li said she’s considering shorting, or betting against, U.S. government securities later this month.

“Yields will still go down, but Treasuries are too expensive for me,” said Li, one of the managers for the $83 billion Mirae invests worldwide. “The ECB may cut rates. After that, it may be a good signal to short Treasuries.”

The U.S. Treasury this week will auction a combined $56 billion of three-, 10- and 30-year debt.

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