Morgan Stanley predicts that shares will stay engaging regardless of rising authorities bond yields

The market may have turned against fears of inflation.

But according to Morgan Stanley’s Matthew Hornbach, it should have happened sooner.

His research shows that the surge in government bond yields will not have a long-term impact on the market, as it is not the type of surge typically associated with weakness in stocks.

“We don’t see any spike in interest rates. We don’t see a tantrum like the one in 2013 when interest rates rose 150 basis points in three months,” the company’s global head of macro strategy told CNBC’s “Trading Nation” Tuesday.

But it took US Federal Reserve Chairman Jerome Powell’s testimony to the Senate Banking Committee Tuesday to quell jitter. Following his comments, the Dow made a massive 360-point comeback, closing nearly 16 points higher.

“Powell talked about the higher interest rates, which we haven’t seen as particularly problematic over the past six months as interest rates have risen,” said Hornbach.

Hornbach lists improvements in Covid-19 case statistics, manufacturing dates and the expectation of another historic virus aid package for the increase in yields. At the close of trading on Tuesday, the benchmark 10-year Treasury note yield was 1.34%. It’s up nearly 24% in the past four weeks but up 9% over the past year.

“The Fed also recognizes the need to keep an exceptional amount of housing in the market, which of course results in short-term interest rates being held at zero longer,” he added. “These two factors together can cause the yield curve to steepen further and long-term interest rates to rise further towards 2%.”

Hornbach said he doesn’t see a problem until the 10-year return hits 2.5%.

“Then I think you might see a different kind of reaction with risky assets – including the stock market,” said Hornbach.

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