$25T Market Hit by Severe Sell-Off

Morgan Stanley analysts say that the market is in a vacuum state, which causes panic and continuous selling, but it may also stimulate more large funds to return to the market...

Andrew Szczurowski, a portfolio manager at Morgan Stanley Investment Management and a member of the Treasury strategy team, said that the $25 trillion Treasury market has plummeted since last week, causing panic among investors, but it may also be a good investment opportunity.

"I think it's a good time to buy because we are in the late stage of the cycle," Szczurowski said. "But we have been in some kind of vacuum state, which makes people scared."

On Wednesday, the yield on the 10-year U.S. Treasury note was above 4.6%, with a higher likelihood of regaining the 5% mark, which is the highest level since 2007.

The sharp rise in the yield on the 10-year U.S. Treasury note, which serves as the benchmark interest rate for the U.S. economy, from about 3.4% in May is particularly worrisome.

Szczurowski believes that part of the reason for the massive selling is that the Federal Reserve hinted last week that interest rates may remain high for a longer period than previously expected, which will ultimately weaken corporate profitability and may trigger more defaults.

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"People are starting to lean towards higher interest rates for a longer time (but not my view)," Szczurowski said.

"Long-term Treasury yields have also shown a certain one-way rise," he said, because the Bank of Japan's decision in July to relax yield curve control policy may stimulate Japanese investors to sell U.S. Treasury bonds.

Japanese investors are the largest foreign holders of U.S. Treasury bonds.

Szczurowski said that the current context is also different from a year ago, with institutional investors' "profit-taking" seemingly taking shape, while last September, investors "bought the dip" due to the turmoil in the financial markets caused by the stress on the UK pension system.However, Szczurowski said that if interest rates remain high while the labor market stays strong, inflation will ultimately fail to fall back to the Federal Reserve's 2% target, making it difficult for the U.S. economy to achieve a soft landing.

"It's like doing a 10-second plank," he said, referring to the U.S. economy operating within the Federal Reserve's current policy interest rate range of 5.25%-5.5%. "You can do it for [10 seconds], but if you try to hold a plank for 10 minutes, your body will be under greater stress, and it will have a greater impact."

Therefore, he also expects the Federal Reserve to cut interest rates faster than the latest "dot plot," which shows the potential path of interest rates.

Szczurowski believes that the current yields on 10-year and 30-year U.S. Treasury bonds may encourage more fund management companies, pension funds, and insurance companies to re-enter the market.