Given how the past few quarters have unfolded, long-term investors are probably asking themselves when it’ll be safe to start buying Treasurys again.
After all, intermediate Treasurys — defined as those with maturity between 1 and 10 years — have been stuck in a serious rut. They’ve turned in consecutive quarters of negative total return for the first time 1973, according to data compiled by Morgan Stanley.
They might not have to wait much longer, says the firm. The Bloomberg Barclays Intermediate Treasury total return index (BBIT) has seen similar streaks of futility on eight occasions over the past 35 years, and each time the gauge delivered a positive cumulative return over the following four quarters, Morgan Stanley data show.
Further, looking across all eight past instances, the BBIT has provided an average return of 6.32% over the subsequent year, according to the firm.
This data provides the foundation for Morgan Stanley’s strategic recommendation, which involves purchasing intermediate-maturity Treasurys and holding them for three to four quarters. That means buying now and holding until the conclusion of fourth-quarter 2018 or first-quarter 2019.
Nervous about it? Morgan Stanley strategist Tony Small doesn’t think you should be.
“Take comfort in knowing history is on your side,” he wrote in a client note.
Of course, it must be noted that market conditions are not consistent over time. Investment environments are constantly shifting, so the question must be asked: Does historical precedent even matter in this situation?
Morgan Stanley hears those concerns loud and clear, and has tested scenarios to address the following two current drivers: (1) rising yields and (2) Federal Reserve rate hikes.
The firm is wise to address past rising-yield scenarios, since that type of environment theoretically leaves bond prices spring-loaded to move higher once the period is over, creating a bias of sorts. In order to test this, the firm isolated returns between 1973 and 1981 and found that returns were positive in each of the subsequent four quarters. So far so good.
Morgan Stanley also notes the strategy it’s recommending has delivered positive returns during Fed tightening cycles in the 1970s, 1980s, 1990s, and 2000s. So much for that concern.
“Our analysis finds that positive total returns were experienced irrespective of market environment,” Small said.
In the end, while the strategy floated by Morgan Stanley has been 100% effective in the past, its sample size of just eight instances makes it far from a sure thing. Investors considering it should still do their homework and use it in tandem with other fundamental market observations. But in a market that’s been frequently starved for opportunity, it’s an excellent starting point.
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