Source: Zhitong Finance

After experiencing the worst monthly slump of the year, Morgan Stanley is urging investors to buy US Treasury bonds. Daimo strategists, including Matthew Hornbach, James Lord, and Andrew Watrous, said in a report that even if the economy does not recede, US bond yields may fall sharply because inflation data will disappoint those who believe inflation will stay high forever.

These strategists' opinions are partly driven by “remaining seasonality,” a statistical “quirk” that affects economic data even after the usual seasonal adjustments. After incorporating this phenomenon into the central bank's forecast of personal consumption expenditure inflation, strategists predicted that inflation would fall faster than the market's current pricing. They expect that the 3-month and 6-month core PCE annualized inflation rate will fall rapidly, “which should open the eyes of investors before the end of the year.”

Such inflation data may push the market to reprice, making it more in line with Morgan Stanley's expectations. The bank's economists currently predict that the Fed will cut interest rates by 25 basis points each three times this year, while swap traders expect the Fed to cut interest rates by 25 basis points each twice.

The strategists added, “This will also involve the market's pricing of the 2025 easing cycle, which is much larger than expected by the market. Currently, the market expects interest rate cuts in 2025 to be slightly higher than 75 basis points.”

It is worth mentioning that the above strategists called on investors to buy US bonds, but after the painful rise in US bond yields, they were caught off guard. These strategists said that the inflation data released by the US Bureau of Labor Statistics and the Bureau of Economic Analysis at the beginning of this year did not take into account “seasonal increases in inflation,” which misled investors to think that inflation was higher than it should be, thus exacerbating the sell-off in the bond market since this year. They added that the presence of remaining seasonal factors can also be seen in measuring employment costs, which became more serious in the post-pandemic period.

The strategists said that although they acknowledge that the remaining seasonal factors that existed in the past do not guarantee that they will exist in the future, it continues to strengthen in so many price indicators, which means “investors have reason to believe that this pattern will continue in the coming year.”

edit/lambor