Morgan Stanley Wealth Management is advising investors to consider shifting their focus from soaring stocks to US Treasurys, as bond yields continue to rise and the equity-market rally shows signs of losing steam. In a note to clients, CIO Lisa Shalett suggests that fixed-income assets, particularly Treasurys with 4.5% to 5.5% coupons and potential for capital gains, could serve as a suitable hedge in case this year’s stock-market rally falters. The recent surge in bond yields, along with concerns that the Federal Reserve may keep interest rates higher for longer to combat inflation, has made bonds more attractive relative to stocks. Shalett cautions investors against counting on a "Goldilocks" scenario and recommends hedging their high-priced stocks.
It Might Be Time to Pile Into US Treasuries, Says Morgan Stanley Wealth Management
Investors may want to consider shifting their focus from soaring stocks to US Treasurys, according to Lisa Shalett, the Chief Investment Officer (CIO) at Morgan Stanley Wealth Management. Shalett believes that the recent spike in bond yields has made fixed-income assets more attractive, signaling a potential hedge if the stock-market rally begins to lose momentum.
Shalett suggests that investors should consider investing in Treasurys with coupons ranging from 4.5% to 5.5%, as they offer decent capital gains potential in scenarios where the economy shows signs of vulnerability. This refers to the ideal scenario where the Federal Reserve successfully brings down inflation to its 2% target without causing a recession in the US economy.
While stocks have outperformed bonds this year, with the S&P 500 surging 15% due to cooling inflation and increased interest in artificial intelligence (AI), bond yields have risen above 4% in recent weeks. This has led investors to worry that the Fed may keep interest rates at higher levels for a longer period of time in order to combat inflation.
When Treasury yields increase, they become more enticing to investors compared to stocks because they offer similar returns with lower risk. Shalett advises purchasing bonds as a precautionary measure in case a "Goldilocks" scenario, where both growth and inflation remain at an ideal level for the economy, does not materialize.
While the optimistic scenario mentioned by Shalett may still unfold, paying peak multiples for reaccelerating earnings and assuming rate cuts from the Fed could be risky. Therefore, Shalett suggests that investors consider hedging their high-priced stocks.
In summary, Morgan Stanley Wealth Management’s CIO believes that it may be a good time for investors to shift their focus to US Treasurys as a potential hedge against a potential slowdown in the stock-market rally. Bond yields have risen in recent weeks, while there are concerns that the Fed may keep interest rates at higher levels for longer. Investing in Treasurys with attractive coupons could offer capital gains potential in case the economy shows signs of vulnerability. However, investors should carefully consider their options and potential risks before making any investment decisions.
Key Takeaways:
- Bond yields have increased in recent weeks, making US Treasurys more attractive compared to stocks.
- Investing in Treasurys with 4.5% to 5.5% coupons could offer decent capital gains potential.
- The stock-market rally may be losing steam, leading investors to consider hedging their high-priced stocks.
- The Federal Reserve’s efforts to combat inflation could impact interest rates and the stock market.
- Investors should carefully evaluate their options and potential risks before making any investment decisions.
