Goldman Sachs calls bonds expensive as Morgan Stanley is bullish

[SINGAPORE] Goldman Sachs Group Inc called Treasuries overpriced and said the Federal Reserve is poised to raise interest rates, clashing with Morgan Stanley's forecast for a rally.

Ten-year Treasuries "look expensive," based on Goldman's assessment of a fair value, Francesco Garzarelli, the London-based co-head of fixed-income strategy, wrote in a report Thursday. Yields should be higher than 2.10 per cent, based on the models the firm uses to analyze bonds, versus 1.84 per cent Friday.

Morgan Stanley says US government securities are poised to gain and the odds of a rate increase in June are declining. Ten-year yields will drop to 1.45 per cent by Sept 30, based on the firm's "base case" forecast, according to a report Thursday by analysts including Matthew Hornbach, the head of global interest-rate strategy in New York.

The firms, which are among the 23 primary dealers that trade with the Fed, are at odds as investors decipher the central bank's views on the economy in its statement this week. Morgan Stanley called the comment "slightly dovish."

Goldman forecasts rate increases in June, September and December. The US plans to report on consumer spending Friday, after data Thursday showed the economy growing at its slowest pace in two years.

Central bankers used their statement to indicate growing confidence in the world economy while suggestingthey're still looking for the signs of growth, inflation and global stability to justify a move.

Treasuries were little changed Friday as of 10:42 am in London, according to Bloomberg Bond Trader data. The price of the 1.625 per cent security due in February 2026 was 98 1/8.

The Bloomberg US Treasury Bond Index has fallen 0.3 per cent in April, heading for its first monthly decline this year. It has returned 2.9 per cent in 2016, with the 10-year yield falling from 2.27 per cent at the close of 2015.

Treasuries were closed in Japan Friday for a holiday. They're scheduled to trade as usual in the UK and the US, according to the Securities Industry and Financial Markets Association. US government securities trading will be shut in the UK May 2 and in Japan for three days starting May 3, based on the association's website.

Goldman Sachs has been calling for yields to rise, though it reduced its year-end forecast in February to 2.75 per cent from 3 per cent.

Morgan Stanley cut its own outlook in March and said 2016 may be known as the "Year of the Bull" for bonds. The firm's March report also included the 1.45 per cent prediction for the end of September.

Early in 2015, with the 10-year benchmark at about 1.9 per cent, Goldman Sachs and Morgan Stanley both predicted it would jump to 2.85 per cent by the close of the year - more than half a per centage point higher than the final level.

BLOOMBERG