(Bloomberg) — This month’s selloff in U.S. government bonds could spark a correction in equity markets before a new cycle of stock gains, according to Morgan Stanley.
“There is growing evidence that long term nominal yields are making a secular trough with several near term catalysts that may extend last week’s rise,” strategists including Michael Wilson wrote in a note on Monday. “Such a development could prove to be very challenging to many equity portfolios that likely embed higher long duration risk than may be appreciated.”
Ultimately, a selloff in equities would likely kickstart a new bull market in stocks, the note added, as higher long-term yields are usually associated with better economic growth the bank anticipates in the year ahead.
The yield on the U.S. 10-year Treasury bond is up 17 basis points this month, rising to as much as 0.7257% on Thursday, the highest since June, as inflation data starts to show signs that the Federal Reserve’s massive liquidity injections may be lifting economic growth.
A rising 10-year yield would tend to favor stocks in the financial, capital goods, energy and materials sectors, Morgan Stanley said.
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