This is too funny...
Check this out
Punchline is last bolded item...
Morgan Stanley suggests reducing bond exposure
Tuesday, September 28, 2004 5:38:30 PM
NEW YORK (AFX) -- Morgan Stanley suggested investors reduce their exposure to bonds on the belief that yields are reflecting an overly-pessimistic view on the economy and an overly-optimistic view on inflation
Banc of America also cut its recommended weighting of "conventional" Treasury bonds, saying they have benefited "disproportionately" from softer economic data
The yield on the benchmark 10-year Treasury note had hit an intraday low of 3.964 percent following weaker-than-expected consumer confidence data, but was last up 0.026 percentage points at 4.023 percent. See
Since the June 29 close (4.695 percent), the yield has declined nearly three-quarters of a percentage point (0.672 percentage points) while the Federal Reserve has raised the overnight lending rate to 1.75 percent from 1 percent over the same time
"Real yields are unsustainably low, inflation complacency abounds and many think that Federal Reserve tightening is nearly over," said Morgan Stanley chief U.S. economist Richard Berner. "The rebound in yields may not be immediate, but I believe a coming change in inflation and growth fundamentals will be catalysts to sell [bonds]." Morgan Stanley said bonds are also pricing in a recession in corporate earnings, while U.S. equity strategist Henry McVey expects earnings growth to simply decelerate
Morgan Stanley's stance on bonds may not be much of a surprise. On Sept. 22, the company reported third-quarter earnings that fell short of expectations as a bet that interest rates would rise following an employment report in July went bad. The jobs data was weaker than expected and bonds rallied, with the 10-year yield hitting a 5 1/2-month low of 3.963 percent on Sept. 23
Banc of America was also suggesting taking profits in conventional bonds
The firm said soft economic data since June has reinforced the Fed's intention to hike rates at a gradual pace, and even raised the prospect that the tightening process might be interrupted. Strategist Thomas McManus feels the bond market may have overreacted
McManus reduced the recommended weighting of conventional Treasury bonds in a balanced portfolio from 15 percent to 10 percent, an all-time low for the firm
He recommended taking that money, plus the money from a reduced cash weighting from 30 percent to 25 percent, and putting it into Treasury Inflation Protected Securities
"TIPS" offer protection from inflation, as interest payments and the underlying principal investment are automatically adjusted to compensate for inflation as tracked by the consumer price index
McManus said that at current market prices, "TIPS" investors can expect to outperform conventional bond buyers if the CPI rises more than 2.3 percent per year over the next 10 years
"For those who are focused on the most crucial of all investment goals -- growing principal, in real terms after taxes, while avoiding loss -- TIPS are an invaluable tool," McManus said
fxstreet.com |
