Morgan Stanley Fund: Increased Uncertainty, US Treasuries Still Have High Allocation Value

According to Zhitong Finance APP, Morgan Stanley Fund stated that since mid-January, the growth expectations for the U.S. economy have weakened, with data consistently falling short of economists' expectations. A major concern in the market is how the Trump administration's policies will affect economic growth, particularly the reduction of immigration, cuts to government employees, and the implementation of tariff policies that could disrupt trade and drive up inflation. Although U.S. Treasury investments have performed well this year, in the face of increasing uncertainty, U.S. Treasury assets (especially government bonds and high-grade credit bonds) can provide strong hedging for risk assets in clients' portfolios and still hold high allocation value.

The weak outlook for economic growth has led the market to expect the Federal Reserve to cut interest rates an additional 60 basis points. This could bring the total number of rate cuts in 2025 to three, along with a possible additional 20 basis points cut in 2026, resulting in the federal funds rate potentially dropping to just above 3%. The yield on 10-year U.S. Treasury bonds has fallen nearly 30 basis points since the beginning of the year, reaching below 4.30%. This sharp shift in sentiment is more pronounced in the stock market: the S&P 500 index has fallen nearly 10% from its peak; the U.S. technology sector has performed particularly poorly, with the Nasdaq index down about 14%, and the "Magnificent 7" stocks down 20%. Risk indicators, such as the Morgan Stanley Global Risk Demand Index (GRDI), show that market sentiment has turned pessimistic.

In such a market environment, U.S. Treasuries and investment-grade bonds have performed well, with the negative correlation between stock and bond assets returning to normal. Morgan Stanley Fund noted that as U.S. Treasury yields across all maturities decline, U.S. Treasuries have had a strong start to the year, once again demonstrating the characteristics of safe-haven assets. Credit bond assets, especially high-grade credit bonds, have shown resilience amid market volatility and have not reflected economic pessimism equivalently. The corporate bond market has demonstrated strong pressure resistance, with the spreads of U.S. investment-grade and high-yield corporate bonds only slightly widening from previous tight levels, while the spreads of agency mortgage-backed securities and asset-backed products have remained generally stable.

Looking ahead, economic uncertainty, the lack of a clear framework in U.S. policy, and global policy divergence are three key themes driving market developments and will continue to be the source of ongoing market volatility throughout the year. Morgan Stanley Fund believes that the strong fundamentals of U.S. corporate and consumer balance sheets enhance the resilience of the U.S. Treasury market, and of course, interest rates and spread levels will have to adjust according to economic uncertainty. Correspondingly, the outcomes of monetary policy will also change and will be formulated in conjunction with specific fiscal policies