After yields surged, is a buying opportunity here? Goldman Sachs, Morgan Stanley, and other major Wall Street banks are bullish on the rebound prospects for U.S. Treasuries.

After weeks of selling pressure pushed U.S. Treasury yields to multi-year highs, Wall Street strategists are beginning to reassess the investment value of U.S. government bonds. Institutions including Goldman Sachs, Morgan Stanley, and Citigroup believe that as Treasury yields have climbed sharply, bond valuation appeal is strengthening. However, significant disagreement remains among major institutions regarding the Federal Reserve's future rate path and the timing of a Treasury rebound. Currently, the 10-year U.S. Treasury yield stands at approximately 5.24%, having earlier risen to multi-decade highs, though strong auction demand last week pushed yields lower. In contrast, short-term Treasury yields have been relatively stable, with the two-year yield hovering around 4.8%. The U.S. bond market was closed Monday due to a holiday. Goldman Sachs strategists led by William Marshall noted in a report published last Friday that although the view that G10 government bond yields would stabilize or decline based on valuations has been repeatedly challenged, long-term forward rates in most major markets are now significantly above reasonable levels, and multiple factors are further reinforcing the case that current bond duration is attractive. Goldman believes that emerging signs of stress in credit markets, combined with improvements in investor positioning structure and market technical risks, could create conditions for a Treasury rebound. The bank noted that mortgage-related convexity risk has fallen to near zero, while asset managers remain underweight benchmark bonds, meaning the technical pressures that may have exacerbated the Treasury selloff are now easing. Goldman recommends positioning through the interest rate swap market for 10-year performance relative to 5-year and 30-year maturities to capture potential yield decline opportunities. Citigroup prefers shorter-term Treasuries. Strategists including Jason Williams said in an October 9 report that with inflation slowing and wage growth weakening, the Fed is unlikely to raise rates to 2023 highs. Citigroup expects the Fed to hold rates steady at this month's monetary policy meeting and considers two- to three-year U.S. Treasuries to be the most appropriate allocation area currently. The bank forecasts core CPI will rise 0.18% month-over-month. Even if core CPI rises 0.3% month-over-month, Citigroup still believes this would not be sufficient to support a Fed rate hike in October. Morgan Stanley also believes Treasury yields have become attractive. Strategists led by Matthew Hornbach noted that unless investors expect U.S. nominal GDP to grow at a 5.7% compound annual rate over the next decade and core PCE prices to rise more than 2.5% annually, current Treasury yields already demonstrate investment value. Morgan Stanley said economists expect U.S. nominal GDP growth of about 4.5% next year, a forecast that implies the 10-year Treasury yield could fall below the current level of about 5.25%. The bank further calculated that if U.S. nominal economic growth remains at 4% to 5% over the next decade with core PCE inflation at about 2%, then referencing historical experience before quantitative easing was implemented, the 10-year Treasury yield could fall back to the 3.5% to 4.5% range. However, Morgan Stanley recommends investors wait until after the Fed's policy meeting this month and the U.S. midterm elections before considering entry. Mitsubishi UFJ Financial Group also believes Treasury valuations have entered a highly attractive range. The bank noted that recent strong demand at U.S. Treasury auctions indicates the previous sharp rise in yields has been sufficient to attract value investors back into the market. At the same time, the group said the U.S. midterm elections could serve as an important catalyst for Treasury movements. Different election outcomes could alter future fiscal spending and policy prospects, thereby affecting the Treasury market. However, not all Wall Street institutions are optimistic about a Treasury rebound. Bank of America strategists including Mark Cabana believe the market is underestimating the possibility of another Fed rate hike this month. Currently, the interest rate swap market reflects only a 19% probability of an October hike, which the bank considers too low. Bank of America noted that if U.S. economic data remains strong, the Fed may face a dilemma: either raise rates further to curb inflation or tolerate continued surging bond yields. Barclays strategists including Anshul Pradhan emphasized that while rising yields have increased the investment appeal of bonds, this does not mean investors are immune to the risk of yields climbing further. The bank calculated that the current 10-year Treasury yield of about 5.25% implies a term premium of approximately 1.3 to 1.5 percentage points. This indicates investors can earn relatively high risk compensation for holding long-term bonds, but it does not mean yields have peaked. UBS also maintains a tactically neutral stance on Treasury duration. The bank believes current yields are above reasonable valuation levels, but with U.S. economic activity still strong and geopolitical risks potentially continuing to push energy prices higher, long-term Treasury yields still face upward pressure. Wells Fargo said some positive signs have emerged in the Treasury market, including the 10-year yield pulling back from a high of 5.35%, recent strong auction subscriptions, and interest rate volatility declining from elevated levels. However, the bank believes that for long-term Treasury yields to sustain a downward trend, the market still needs to see catalysts pointing to a clear weakening in economic growth. U.S. inflation data due this week will be key to determining whether the Treasury rebound can continue. Currently, most strategists expect core CPI to rise about 0.2% month-over-month, suggesting inflation pressures may be easing somewhat. But if actual data comes in above expectations, the market may re-price higher Fed rate hike bets, pushing Treasury yields up again.