Load up on bonds for their juicy yields before the stock-market rally loses steam, says Morgan Stanley

• It might be time to pile into US Treasurys, according to Morgan Stanley Wealth Management.

• Bond yields have jumped in recent weeks, while the equity-market rally may be losing steam.

• “Investors should consider hedges for their high-priced stocks,” CIO Lisa Shalett said.

It might be time to ditch soaring stocks and pivot to US Treasurys, according to Morgan Stanley Wealth Management’s CIO.

Lisa Shalett said in a note to clients Monday that spiking yields had made bonds much more attractive in recent weeks, signaling that fixed-income assets could be a suitable hedge if this year’s breathless stock-market rally starts to lose steam.

“Investors may want to deploy incoming cash to Treasuries with 4.5% to 5.5% coupons and decent capital gains potential in scenarios where the immaculate soft landing shows signs of vulnerability,” she wrote.

That’s a reference to the dream scenario whereby the Federal Reserve manages to bring inflation down to its 2% target without plunging the US economy into a recession.

Stocks have thrashed bonds this year. The S&P 500 has soared 15% due to cooling inflation and the surge in interest in AI, while both 2-year and 10-year Treasury prices have fallen.

However, bond yields have risen above 4% in recent weeks, while the equity rally has petered out with investors fretting that the Fed might hold interest rates at a higher level for longer as part of its effort to tame inflation.

When Treasury yields rise, they become more attractive to investors relative to stocks because they offer similar returns at a lower risk level.

Investors should buy bonds in case a “Goldilocks” scenario – where both growth and inflation hover at a level that’s “just right” for the economy – doesn’t play out, Shalett said.

“Better-than-feared economic developments have apparently delivered an immaculate soft-landing, emboldening equity investors to price out the potential for further profits recession or an eventual economic recession,” she said.

“While that optimistic scenario could yet play out, paying peak multiples on reaccelerating earnings and assuming Fed rate cuts strike us as counting on a Goldilocks scenario despite unsure odds,” Shalett added. “We believe investors should consider hedges for their high-priced stocks.”

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