Morgan Stanley Clashes With Goldman on Bonds as Market Surges

Morgan Stanley says 2016’s bond market rally has further to run. Goldman Sachs Group Inc. says benchmark Treasury yields may be poised to jump.

The two fixed-income powerhouses are at odds as bonds surge this year. Yields from Japan to New Zealand tumbled to records Monday, while benchmark Treasuries advanced for a fifth day. Investors are rushing to debt as the U.K. debate over leaving the European Union drives demand for the safest assets. The Federal Reserve meets Tuesday and Wednesday, following data that showed the slowest job growth in almost six years. Bank of Japan officials gather June 15-16.

“The year started with a bullish tone, and we think that tone is reasserting itself now,” Morgan Stanley analysts including Matthew Hornbach, the head of global interest-rate strategy in New York, wrote in a June 10 report. The Fed will probably make the case for a gradual, cautious approach to raising interest rates, and the BOJ will likely ease monetary policy, the analysts said.

‘Very Stretched’

Goldman Sachs strategist Francesco Garzarelli warned his clients that U.S. Treasury yields may climb “sharply” in the second half of 2016, in a note also June 10. The payrolls figure “seems like an outlier” and bond valuations are “very stretched,” wrote Garzarelli, who is based in London.

Treasury 10-year yields dropped two basis points to 1.62 percent as of 6:46 a.m. in London on Monday. They have fallen from 2.27 percent at the end of 2015. A Bloomberg survey of economists conducted Dec. 4 to Dec. 9 projected the yield would climb to 2.55 percent by June 30. 

Japan’s 10-year yields fell to a record minus 0.165 percent. Those in South Korea, Taiwan’s and New Zealand also dropped to all-time lows, following Germany and the U.K. last week.

Goldman’s Garzarelli has been negative on Treasuries throughout 2016, while Morgan Stanley’s Hornbach has stuck to his bullish views. The two companies are both primary dealers, among the 23 banks that trade directly with the Fed and underwrite the U.S. debt.

For more on the outlook for the Federal Reserve and interest rates, click here.

Bonds in the U.S., the U.K., Germany and Japan all stand to benefit in this year’s rally, Morgan Stanley said. Government debt is surging around the world, sending the yield on the Bloomberg Global Developed Sovereign Bond Index to a record low of 0.58 percent last week.

The gauge has gained 10 percent this year, versus 1.9 percent for the MSCI All Country World Index of shares including reinvested dividends.

source: Bloomberg