Global markets reassess the "American exceptionalism" narrative, Morgan Stanley: U.S. Treasuries are the biggest beneficiaries

For a long time, the "American exceptionalism" narrative has been an important driver of the global macro market. Now, this narrative may be becoming outdated.

On the 3rd, Morgan Stanley global macro strategist Matthew Hornbach and his team pointed out in a recent research report that as growth risks on both sides of the Atlantic become increasingly prominent, "American exceptionalism" is facing greater challenges.

Morgan Stanley noted that since August 2024, although forecasters have continuously raised the growth expectations for the U.S. relative to the Eurozone, this has mainly been achieved by lowering the growth expectations for the Eurozone, and the U.S. own growth expectations have not been raised in tandem. This phenomenon of "negative divergence," as analysts describe it, suggests that "American exceptionalism" may be coming to an end.

As the narrative of "American exceptionalism" gradually loses support, Morgan Stanley believes that U.S. Treasuries will become the biggest beneficiaries of the weakening narrative of "American exceptionalism." Since September 2024, U.S. Treasury yields have been declining amid market volatility and are nearing the 200-day moving average. The report points out that further declines in U.S. Treasury yields require a "dovish" shift in Federal Reserve policy, and the current market pricing of the Federal Reserve's policy rates has already shown a significant downward trend.

The Cracks in "American Exceptionalism": Divergence in Growth Expectations

The narrative of "American exceptionalism" has been the core logic of the global macro market for the past two years. This narrative is based on the strong performance of the U.S. economy relative to the Eurozone, as well as the advantages of the U.S. in technology and policy flexibility. Over the past two years, the U.S. economy has performed impressively, not only outperforming the Eurozone but also exceeding market expectations for U.S. growth itself.

However, Morgan Stanley's report indicates that this narrative is facing unprecedented challenges.

The charts in the research report clearly illustrate this point. After significantly outperforming over the past two years, the market consensus forecast for actual GDP growth in the coming year has begun to lean towards the U.S. continuing to maintain its advantage. After the 2024 U.S. elections, the gap in growth expectations further widened, but this was entirely due to the market lowering its expectations for Eurozone growth—unlike after the 2016 elections, when the widening of growth expectations was entirely due to the market raising its expectations for U.S. growth.

Analysts refer to this situation as "negative divergence": when asset prices reach new highs, the technical indicators tracking that asset do not reach new highs in tandem. The research report argues that the recent widening of the growth expectation gap has not been accompanied by an increase in U.S. growth expectations, which is precisely the negative divergence of "American exceptionalism," signaling its end

Morgan Stanley: U.S. Treasuries are the Biggest Beneficiaries

How will changes in economic growth expectations affect the interest rate market? The Morgan Stanley team believes that as the narrative of "American exceptionalism" gradually loses support, U.S. Treasuries will become the biggest beneficiaries of the weakening narrative of "American exceptionalism."

Since September 2024, U.S. Treasury yields have been continuously declining amid market volatility and are approaching the 200-day moving average. The report points out that further declines in U.S. Treasury yields require a "dovish" shift in Federal Reserve policy, and the current market pricing of the Federal Reserve's policy rate has already shown a significant downward trend.

Additionally, although market expectations for growth in the Eurozone have deteriorated since August 2024, the market-implied minimum policy rate of the European Central Bank remains relatively stable. In contrast, despite stable market expectations for U.S. growth, the market-implied minimum policy rate of the Federal Reserve has risen significantly.

Morgan Stanley expects that as the narrative of "American exceptionalism" gradually cools, the minimum rate pricing in the U.S. and Eurozone will become closer, and the U.S. dollar will underperform the euro—similar to the situation in 2017.

The report also mentions that U.S. 2-year Treasury Inflation-Protected Securities (TIPS) have performed strongly over the past month, and this trend is expected to continue.

"Tariff Fatigue" Approaches, Dollar Bulls May Retreat

In addition to changes in economic growth expectations, tariff issues are also an important factor affecting market trends. The tariff policy of the Trump administration has been a focal point for investors, but the Morgan Stanley team observes that the market's sensitivity to tariff news is declining, showing signs of "tariff fatigue."

The report analyzes the intraday volatility of G10 currency pairs following tariff-related statements from Trump, finding that the market's reaction to tariff news is becoming increasingly sluggish. This phenomenon exists in both cases of tariff escalation and de-escalation.

Morgan Stanley believes that as investors grow fatigued with tariff news, the market-implied tariff risk premium will weaken, leading to a decline in the U.S. dollar. The report states:

"Although the strength of the dollar has begun to weaken, especially after the U.S. presidential inauguration, we believe there is still room for this process to continue."

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