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Morgan Stanley IM’s view offers a more benign reading of the yield rise than fears of fiscal strain or a growth scare, and if markets adopt it, US equities could keep absorbing higher yields as long as earnings deliver. The house’s underweight in duration and preference for credit suggest it expects long-dated Treasuries to stay under pressure rather than rally. Its tilt toward Japan aligns with strong nominal growth there, while the underweight on Europe points to relative weakness in European stocks. For oil, the inflation component of high nominal growth is worth watching, since energy costs tied to the Iran war feed directly into it. The main risk to the thesis is a disappointing Q3 earnings season, which would remove the cushion Caron says is supporting equity prices.
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Earlier:
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Morgan Stanley’s investment arm reads the rise in Treasury yields as a sign that the US economy is running hot, and it is betting US earnings can stay one step ahead of borrowing costs.
Summary:
- Morgan Stanley Investment Management, which oversees around $2 trillion, favours US and Japanese equities and is underweight Europe.
- Jim Caron, CIO of its Portfolio Solutions Group, says higher yields reflect resilient nominal growth rather than economic stress, with US real growth plus inflation running at about 6.5%.
- The US 10-year yield peaked at around 5.3% on 5 October this year before easing to around 5.1%.
- The firm is underweight duration and overweight credit, and has cut interest rate sensitivity across its portfolios.
- Caron said potential Democratic gains in November’s midterms could narrow US opportunities toward large, established companies such as AI hyperscalers.
- He said private credit has moved past its correction phase, with more exits allowing capital to be deployed at today’s higher rates.
Morgan Stanley Investment Management says the rise in government bond yields this year reflects strong economic growth rather than stress, and is not yet a warning sign for equities, as it maintains a preference for US and Japanese stocks over those in Europe.
Jim Caron, chief investment officer of the Portfolio Solutions Group at the firm, which managed around $2 trillion in assets at the end of September, told journalists in a recent webinar that higher yields increasingly reflect resilient nominal growth. Nominal growth combines real economic expansion with inflation, and Caron put that figure at about 6.5% in the US. He pointed to firm growth, robust labour markets and productivity gains as factors supporting activity while helping to ease inflation pressure.
The US 10-year Treasury yield climbed to around 5.3% on 5 October, its high for the year, before easing to around 5.1%. Caron said such a move was natural given the pace of nominal growth, arguing that bonds are not signalling a slowdown and that yields are rising for sound reasons. In his view, bonds have taken a knock but are not broken.
The question for investors is when higher yields begin to weigh seriously on stocks. Caron’s answer rests on earnings. He said strong nominal growth points to healthy corporate cash generation and described expectations for third-quarter earnings as very robust. He argued that the US equity market is better placed than any other to benefit from that growth, and said Japan is also well positioned after a period of strong nominal growth.
That view offers a different explanation for the same trend highlighted by Goldman Sachs (link to post above), which has attributed the global rise in yields to intensifying competition for capital from government borrowing and AI investment. Both see higher yields as the new backdrop; they differ on whether it is driven mainly by demand for funding or by the strength of the economy itself.
In bonds, Morgan Stanley IM is underweight duration, overweight credit and has reduced interest rate sensitivity across its portfolios. On politics, Caron said potential Democratic gains in November’s midterm elections, and any pushback against the administration’s deregulation agenda, could narrow US opportunities and favour large, established firms such as AI hyperscalers.
On private markets, Caron said private credit has completed its correction phase after stress earlier this year in areas such as software. A pick-up in exits is creating room to deploy capital at today’s higher rates, he said, though he expects the next phase to be slower.
The third-quarter earnings season will be a key test of whether profits can continue to outpace the rise in borrowing costs.
This article was written by Eamonn Sheridan at investinglive.com.
