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Trade tensions can wreak havoc on the stock market, but volatility provides an excellent opportunity to invest in bonds according to Morgan Stanley (MS).
The 10-year US Treasury yield has already peaked for the year, according to Matthew Hornbach, global head of Morgan Stanley's interest rate strategy. United States. & # 39; Trade tensions and the strengthening of the dollar are now making a good time to buy Hornbach paper notes wrote in a note on Friday.
"We have seen the high yields of 10-year US Treasuries this year, in our opinion," Hornback wrote. We began to take note of a changing dynamic for government bond markets in late April and early May, spurred by the strengthening of the US dollar and weak emerging markets. way that prevented the yields of government bonds from going higher. "
Morgan Stanley expects escalating trade tensions to weaken economic performance and strengthen the dollar in the third quarter, reducing treasury yields. Analysts also predict a sharp rise in Japanese investment in US Treasuries in July, which will drive up prices, especially as the Treasury will not borrow more long-term bonds. before Independence Day.
Yields were at their highest level since May 15, 2011, as President Trump pulled out of his North Korea summit.
The biggest risk for bond prices is a painless resolution of the brewing trade war – an increasingly unlikely outcome according to Morgan Stanley's public policy team.
"The main risk for this trade is a rapid resolution of trade tensions in the coming weeks," Hornbach said. "This would reduce the chances that these tensions will be felt in US economic activity during the summer".
The yield on 10-year Treasury bills dropped 0.0287 percentage points to 2.877% on Monday morning.
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