Selling U.S. Treasuries to buy gold is "not a wise move in the medium to long term"! Morgan Stanley's rates team: U.S. Treasuries will eventually "shine".

Recently, there has been a surge in the trend of "selling bonds to buy gold." However, Wall Street investment bank Morgan Stanley insists that U.S. Treasuries are a better long-term choice.

According to news from Chasewind Trading Desk, the bank stated in a research report released on October 24th that although foreign official investors may have recently shifted funds from U.S. Treasuries to gold, historical data indicates that this strategy may not be wise in the medium to long term. As downside risks to economic activity intensify, the environment for holding U.S. Treasuries is becoming increasingly attractive.

Recent market dynamics show a significant change in asset allocation by foreign official institutions. According to the report citing New York Fed data, from July 30, 2025, to October 22, the scale of U.S. Treasuries held in custody by foreign official and international accounts at the New York Fed decreased by nearly $155 billion. These funds did not flow into the Fed's Foreign and International Monetary Authorities (FIMA) repo facility.

Coincidentally, during the same period, gold prices—which had been consolidating since mid-April 2025—started a steep rally, with gains exceeding 25% at one point. Therefore, the report suspects that foreign official investors may have used proceeds from selling U.S. Treasuries to buy gold.

Despite potential selling pressure, the U.S. Treasury market remains resilient. Analyst Matthew Hornbach wrote:

Although demand for U.S. Treasuries from foreign official investors may be declining, the performance of Treasuries since July has still been outstanding.

The report emphasizes that the strategy of selling Treasuries and buying gold may be "disappointing" in terms of total returns over the medium to long term.

Lessons from History: Selling Treasuries to Buy Gold is Not Sustainable

Although the logic of "selling bonds to buy gold" seems straightforward, Morgan Stanley questions the long-term effectiveness of this strategy by reviewing historical data.

The report clearly states that in the past 50 years, "gold's performance in any given decade has not been better than U.S. Treasuries."

For example, the report says that gold surged during 1975 to 1980 along with inflation; but between 1980 and 1985, as inflation subsided and the Fed guided interest rates lower, gold posted negative returns.

Additionally, from a volatility perspective, the report shows that total return volatility for gold is much higher than for medium-term U.S. Treasuries, and similar to long-term Treasuries. For most central banks aiming to manage mid-and-short-term Treasury indices, shifting to higher-volatility gold assets may not be justifiable.

No Need to Fear the Selling Wave—Treasuries Will "Shine" Eventually

As for the reduction in U.S. Treasury holdings by foreign official investors, Morgan Stanley is not concerned. The report notes that this is actually a long-term trend that has lasted over a decade.

Data show that the share of U.S. Treasuries held by foreign official investors (excluding the Fed's SOMA portfolio) as a portion of market circulation has dropped from 41% in mid-2014 to the current 16%. Notably, the report mentions that China’s official agencies now hold only 3% of the circulating Treasuries. This indicates that the market has gradually digested this structural change.

Looking ahead, Morgan Stanley believes that the environment for holding U.S. Treasuries is growing more attractive as downside risks to economic activity increase.

The report analyzes that market pricing of the future Fed policy path should lean toward a more "dovish" scenario than the baseline. The report contends that as the market prices in lower terminal rates from the Fed, U.S. Treasury yields should continue to decline.

In summary, Morgan Stanley believes that although gold currently captures all the attention, investors should prepare for the upcoming "shining moment" of U.S. Treasuries. In the report, the bank reiterated several trading suggestions, including going long 5-year U.S. Treasuries (UST 5y) and steepening the yield curve (UST 3s30s).

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The above comes from Chasewind Trading Desk.

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