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DEMAND FOR TREASURIES IN 2025 MAY SURPRISE – MORGAN STANLEY

Demand for U.S. Treasuries is likely to be strong next year, despite expectations by some that yields will need to rise to attract buyers, Morgan Stanley analysts including Martin Tobias said in a report outlining the bank’s “Top 10 Surprises for 2025.”

“Structural demand for Treasuries is much stronger than many investors expect,” the bank said, arguing that three key investors – banks, foreign investors and pension funds – will be large supporters of the market.

"We expect lower long-end yields and think current term premium should satisfy investor demand," the analysts said.

For banks, “less stringent regulation, QT ending, and more certainty around the path of Fed policy leads banks to increase Treasury holdings,” Morgan Stanley said. In particular they will seek out intermediate-dated debt, with yields on Treasuries in the “belly“ of curve now more competitive against excess cash deposited at the Federal Reserve.

Foreign investors, meanwhile, will be drawn to U.S. bonds by the expectation of lower rates.

“Foreign demand for Treasuries is inversely linked to the level of US policy rates. As focus shifts to the negative impact on US growth from more stringent immigration policy and higher tariffs, foreign investors focus on the increased likelihood for a lower Fed policy rate,” Morgan Stanley said.

Pension funds will also seek out bonds as their funding statuses remain above 100%, leading them to de-risk and re-balance out of stocks into longer-dated U.S. government debt.

Record high equity prices have led to rebalancing into bonds in recent years, Morgan Stanley said.

“This incentive to de-risk out of equities (return enhancers) and into Treasuries (volatility reducers) remains in place in 2025, especially if long-end rates remain at elevated levels while equities continue to climb even higher. The conditions are in place for pensions to likely have a significant demand presence in the long end in 2025,” the bank said.

(Karen Brettell)

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