Wall Street Advises Buying 5-Year Treasury Notes Amid Market Changes

Investment giants on Wall Street, namely Morgan Stanley and JPMorgan, have recently put forth recommendations for investors to look into acquiring five-year U.S. Treasury notes. This guidance surfaces as a response to a notable decline in these securities, marking the most substantial dip since the previous May. Specifically, the iShares 7-10 Year Treasury Bond ETF has witnessed a decrease of 1.1% for the year, and the iShares 3-7 Year Treasury Bond ETF has experienced a 0.4% drop so far (data as of January 19, 2024).

Morgan Stanley Sees Potential for Treasury Bond Revival

Analysts from Morgan Stanley, under the leadership of Matthew Hornbach, who heads their global macro strategy division, predict that Treasury bonds might see a rebound. They reason that forthcoming economic reports could reveal weaker figures than current expectations, potentially benefiting Treasury securities.

JPMorgan Emphasizes Attractive Yield Levels

JPMorgan's strategy includes buying five-year notes, attracting attention with yields that have climbed back to levels not witnessed since the previous December. They also urge caution, alluding to potentially premature market anticipation of rate cuts by central banks. Many investors harbor anticipations of a 75-basis-point reduction in rates throughout the year.

Context of Recent Yield Increases and Speculation of Rate Cuts

There's been a noticeable lift in the yield for five-year U.S. bonds by 22 basis points in the last week alone, a jump unmatched since mid-May. Expectations for Federal Reserve rate cuts have seemingly cooled, with less probability assigned to a rate decrease come March. Nonetheless, should the upcoming data dovetail with the Federal Reserve's aims for a 'soft landing', that could lead to a lowering of interest rates later in the year. The timing, rate, and extent of such cuts would hinge on unfolding economic indicators and inflation trends.

Forecasting the Timing Of Fed Rate Cuts

JPMorgan speculates the initial Fed rate cut might arrive in June instead of the current predictions for May, as inferred from swap contract pricing. Morgan Stanley advises keeping a watchful eye on central banks in both the United States and Europe come mid-March, with the market expecting at least one rate reduction by spring. Such a move would likely cause a spike in bond prices.

Spotlight on Intermediate-Term Bond ETFs

Considering the current climate, investors should contemplate buying into the recent dip in intermediate-term bond ETFs. Some of these include the Vanguard Intermediate-Term Treasury ETF which is down 0.8% year-to-date (YTD) with an annual yield of 2.75%, the SPDR Portfolio Intermediate Term Treasury ETF down 0.6% with a 3.02% annual yield, and the iShares Intermediate Govt/Credit Bond ETF which is down 0.3% and yields 2.76% annually. Apart from government bonds, certain corporate bond ETFs also present investment opportunities. For instance, the Vanguard Intermediate-Term Corporate Bond ETF has fell 1.2% YTD, offering a 3.76% yield annually, while the Invesco BulletShares 2029 High Yield Corporate Bond ETF is down 0.4% YTD, with an impressive yield of 6.45% annually.

Investing, Bonds, Treasury