(Bloomberg) -- On the heels of their worst monthly rout this year, Morgan Stanley is urging investors to snap up US government bonds. 

“Even if the economy doesn’t go down, bond yields could still fall dramatically as inflation data disappoint the higher-forever true believers. Buy bonds,” strategists including Matthew Hornbach, James Lord, and Andrew Watrous recommended in a note dated Saturday.

Their endorsement is driven in part by “residual seasonality,” a statistical quirk thought to sway economic data even after the usual seasonal adjustments have been made. After incorporating the phenomena into the bank’s forecast for personal consumption spending inflation, the strategists are predicting a more rapid decline in inflation than the market is currently pricing in.

They expect a rapid deceleration in both three- and six-month annualized rates of core PCE inflation. That, the strategists wrote, “should open investor eyes into year-end.”

Such inflation readings could drive the market to reprice more in line with Morgan Stanley’s expectations. The broker’s economists are currently forecasting the Federal Reserve will make three 25 basis point cuts to its target rate this year while swaps traders are expecting roughly 50 basis points of easing. 

 “It would also involve the market pricing in a much more substantial easing cycle in 2025 than the market, which currently prices in just over 75bp of cuts,” they added.

The strategists are among a number on Wall Street that have been caught wrong-footed on their calls to buy US debt this year after a painful rise in bond yields. 

The Morgan Stanley strategists said the Bureau of Labor Statistics and the Bureau of Economic Analysis’ inflation prints at the start of the year didn’t take into account “the seasonal uptick in inflation,” fooling investors into pricing in higher inflation than they should have and fueling the year-to-date bond market selloff.

The firm says the existence of residual seasonality was also visible in measures of employment costs, and in the post-pandemic period, its presence got worse.

While the strategists did acknowledge that the existence of residual seasonality in the past does not guarantee its presence in the future, its strengthening presence in so many price metrics means “investors would be forgiven for gaining confidence that the pattern will continue in the coming year,” they said.

--With assistance from Elizabeth Stanton.

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