Tuesday, July 19, 2016

Morgan Stanley: "To Make Up For A 10% Drop 
In The S&P, Treasury Yields Would Need 
To Go… Negative"
Morgan Stanley in its Sunday Start note writes that "over the last 17 years, 10yr government debt in the U.S,, Germany, the UK and Japan has produced a better return than the local equity market, with lower volatility. "Over the next 10 years, our long-term return models suggest something different. Based on our expected returns for both bonds & stocks, & using historical volatility, 10yr government debt will post worse Sharpe ratios than equities (or credit) over the next decade .. We often think of bonds as natural shock absorbers, ‘zigging’ when the market ‘zags’. It’s important to remember this wasn’t always the case. How could this change? One way would be if yields simply don’t have enough room to fall further to offset equity market declines. Take a 60/40 portfolio constructed today from the S&P 500 and U.S. Treasuries. To make up for a 10% decline in the equity market, Treasury yields would need to go… negative. Not impossible, but certainly a high hurdle! We think investors in European and Japanese bonds are seeing a clear example of this dilemma, with Bunds and JGBs simply unable to rally enough to offset recent equity market declines."
LINK HERE to the article

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