Strategists at Morgan Stanley see the trend in Treasury yields staying higher in the longer term.
Economic cycles are shifting, and for the past few years, have increasingly resembled the ones seen most during the post-World War II period, according to Morgan Stanley.
In 2021, the investment bank forecast that the market dynamics experienced during the disinflationary boom of 1982 until 2020 would be unlikely to last for the following eight to ten years.
"Instead, we are now in a period more akin to the post WWII era during which economic cycles were driven by higher nominal GDP [gross domestic product] growth and persistent inflation well above 2%," a team led by Mike Wilson, chief U.S. equity strategist and chief investment officer, wrote in a note on Monday.
"This means higher economic volatility and a more reactive monetary policy environment as inflation ebbs and flows," they added.
While the period between 1982 and 2020 saw a multi-decade Treasury bond bull market, where yields eventually fell to as low as 0.5%, Wilson notes the reversal of this trend is now clear - with implications for all capital markets.
The U.S. Treasury said last week that it would double its buyback of longer-dated Treasurys as a means of bringing down yields. It came after the yield on the 30-year BX:TMUBMUSD30Y rose to its highest level in 19 years, while the 10-year yield BX:TMUBMUSD10Y climbed to a peak last reached in January 2025.
"We believe the trend in yields remains higher in the longer term, with the occasional cyclical bull market along the way, much like we experienced between 1945 and 1982 (the prior 36-year secular bear market for bonds)," the strategists wrote.
Their thesis is based on the Kondratieff cycle, which suggests 40 to 60-year cycles of surges and then declines.
But, based on Morgan Stanley research, inflation is positive for most equities, particularly for cyclical stocks, and when earnings growth has already priced in a recessionary outcome.
The strategists recommend quality stocks with large market capitalizations, adopters of artificial intelligence and the S&P 500 over international stocks. The bank is overweight the financial, industrial and consumer discretionary goods sectors.
They wrote that AI enablers, such as semiconductor companies SOX, have displayed a similar pattern to silver stocks SIL, but with a four-month lag.
This shows that chipmakers, which have suffered from a rotation out of early-cycle AI stocks, are not likely to retake leadership once again in the near-term, the strategists said.
-Nora Redmond
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