Morgan Stanley's new bond market outlook defies both Goldman Sachs and Warren Buffett

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• US 10-year Treasurys have been mired in a bear market for an extended period, but Morgan Stanley says the worst has already passed.
• The firm's newly bullish outlook on Treasurys conflicts with recent bearish commentary floated by both Goldman Sachs and billionaire investor Warren Buffett.

Morgan Stanley is calling the end of the extended bond market selloff.

"We think the bell has tolled for the best of the bear market in longer-duration bonds," a group of strategists led by Matthew Hornbach wrote in a new note to clients.

The firm's shift in outlook contrasts with commentary from other areas of Wall Street, most notably Goldman Sachs, which is so spooked by the bear market in bonds that it's considering worst-case scenarios for both fixed-income and equities.

Goldman warned recently if the 10-year US Treasury yield exceeds 4.5% by year-end, stocks could get whacked to the tune of a 25% loss. And while the 10-year, which is currently at 2.85%, still has a ways to go to trigger that doomsday scenario, the main takeaway is that Goldman is bracing for such an event in the first place.

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Treasury bonds have been mired in a bear market, as indicated by the chart. Note that bond yields move inversely to underlying prices.

Morgan Stanley's consensus-flouting bond market outlook also contrasts with recent comments made by Warren Buffett in Berkshire Hathaway's annual letter.

The multi-billionaire investor said traditional ideas of diversifying a portfolio using a specific ratio of stocks to bonds are flawed. In Buffett's mind, a diversified portfolio of equities progressively becomes less risky than bonds over extended periods of time.

"It is a terrible mistake for investors with long-term horizons ... to measure their investment 'risk' by their portfolio's ratio of bonds to stocks," Buffett wrote in the February 24 letter. "Often, high-grade bonds in an investment portfolio increase its risk."

Buffett's skepticism around bonds reflect his underlying belief that they could get riskier over the long term, which flies in the face of Morgan Stanley's bullish shift.

In the end, Morgan Stanley knows it's going against the grain with its self-described "provocative" forecast - and it doesn't care. The reason why stems from what Morgan Stanley sees as a flawed herd mentality.

"History has shown that consensus estimates for Treasury yields are usually wrong," wrote Hornbach. "Either the consensus is wrong in terms of direction or, when it has the direction correct, the consensus is wrong in terms of timing. The wisdom of crowds has yet to grace itself on bond yield forecasters."

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