Investing.com – The negative correlation between stocks and US government bond yields is likely to continue until they return below the 4.50% level, according to analysts Morgan Stanley (NYSE: ).
After a multi-month retreat last week following softer-than-expected inflation data, the 10-year yield edged higher on Friday in response to mixed numbers showing strong US manufacturing and single-family home construction.
The numbers, along with continued uncertainty about the potential impact of President-elect Donald Trump's policy plans, helped maintain expectations that the Federal Reserve could quickly pull out interest rate cuts this year.
Although equities have remained buoyant on hopes that Trump's return to office will usher in a period of relaxed rules and corporate tax cuts, recently raised bond yields have threatened the stock's appeal.
“The index will be determined primarily by the level and direction” of long-term yields and the premium of the name, or more returns to investors seeking to hold past bonds instead of short-term debt, Morgan Stanley analysts led by Michael Wilson. he said in a note to clients.
The “negative correlation” between bonds and stocks is bound to continue until the 10-year yield falls “below 4.50% and/or the term premium decreases steadily”, they added.
Analysts say that, in the current trading environment, they prefer “high-quality stocks in all industries showing consistent earnings adjustments”, especially finance, media and entertainment, and consumer services over consumer goods.