Investing.com – The negative correlation between stocks and US Treasury yields is likely to persist until they fall below the 4.50% level, according to analysts Morgan Stanley (NYSE:).
After pulling back from multi-month highs last week following softer-than-expected core inflation data, the benchmark 10-year Treasury yield rose on Friday in response to separate data showing solid U.S. manufacturing and construction family houses.
The numbers, along with continued uncertainty over the possible impact of President-elect Donald Trump’s policy plans, helped maintain expectations that the Federal Reserve could slowly introduce potential interest rate cuts this year.
While stocks remained somewhat buoyed by hopes that Trump’s return to office would usher in an era of looser regulations and corporate tax cuts, recent increases in bond yields have undermined the stock’s appeal.
“The direction of the index will primarily be determined by the level and direction” of longer-term yields and the term premium, or excess yield that investors demand for holding old-dated bonds instead of short-term debt, Morgan Stanley analysts led by Michael Wilson said in a note to clients.
The “negative correlation” between bonds and stocks is forecast to persist until the 10-year yield falls “below 4.50% and/or the term premium declines on a sustained basis,” they added.
Analysts said in the current trading environment they preferred “higher quality stocks across industries showing momentum in relative earnings revisions”, particularly financials, media and entertainment and consumer services over consumer staples.
