Morgan Stanley Sees Stocks Hit in Bond Rout as Bull Market Forms

This month’s selloff in U.S. government bonds could spark a correction in equity markets before a new cycle of stock gains, according to Morgan Stanley.

“There is growing evidence that long term nominal yields are making a secular trough with several near term catalysts that may extend last week’s rise,” strategists including Michael Wilson wrote in a note on Monday. “Such a development could prove to be very challenging to many equity portfolios that likely embed higher long duration risk than may be appreciated.”

Morgan Stanley Sees Stocks Hit in Bond Rout as Bull Market Forms

Ultimately, a selloff in equities would likely kickstart a new bull market in stocks, the note added, as higher long-term yields are usually associated with better economic growth the bank anticipates in the year ahead.

The yield on the U.S. 10-year Treasury bond is up 17 basis points this month, rising to as much as 0.7257% on Thursday, the highest since June, as inflation data starts to show signs that the Federal Reserve’s massive liquidity injections may be lifting economic growth.

A rising 10-year yield would tend to favor stocks in the financial, capital goods, energy and materials sectors, Morgan Stanley said.

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