The past year's historic bear market in Treasuries has recently entered a zone where yields offer adequate compensation for risk. After waiting patiently for a year, investors now can see US Treasury yields that offer value, and should wait for the right moment to buy them with the intent of harvesting the term premium now evident in the market. Term premium -- the additional yield typically offered by longer-maturity than short-maturity debt securities -- has increased markedly in Treasuries, and by some measures, it's never been higher.
Our preferred indicator is the market-implied one-month rate 30 years from now, currently around 3.52%. The Federal Reserve's survey-based estimate of the longer-run policy rate is 2.5%. Were it to rise to 3%, term premiums would still look attractive, but more in line with experience, There are several caveats though.
Value-traps exist, and the speed with which that value arrived is unprecedented, so it warrants caution.
- Morgan Stanley Strategy
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