The U.S. 10-year Treasury yield has already peaked for the year according Morgan Stanley global head of interest-rate strategy Matthew Hornbach. The U.S.' trade tensions and strengthening dollar are making now a good time to buy Treasury notes Hornbach wrote in a note Friday.
"We have seen the highs in 10y US Treasury yields this year, in our view," Hornback wrote. "That's right, 3.12% was it. We started to take note of a changing dynamic for global government bond markets in late April and early May. That dynamic, encouraged by a stronger US dollar and weaker EM markets, has continued to evolve in a way that has prevented government bond yields from moving higher."
Morgan Stanley expects escalating trade tensions will weaken economic performance and strengthen the dollar in the third quarter, lowering Treasury yields. Analysts also foresee a surge in Japanese investment in U.S. Treasuries in July that will drive prices up, especially as the Treasury will not auction more long-end bonds until after Independence Day.
Yields were at their highest since 2011 on May 15 amid concern that President Trump would withdraw from his North Korea summit.
The biggest risk to bond prices is a painless resolution to the brewing trade war - an increasingly unlikely outcome according to Morgan Stanley's public policy team.
"The main risk to this trade is a quick resolution to the trade tensions over the coming weeks," Hornbach said. "That would reduce the chance that these tensions make their way into U.S. economic activity over the summertime."
The yield on 10-year Treasury notes fell 0.0287 percentage points to 2.877% in morning trading Monday.