“The rise in bond yields that we have been expecting since November has been much faster and more forceful than we foresaw. Stronger economic data and the U.S. fiscal stimulus have lifted the ‘fair value’ for 10-yr Treasuries by around 40 basis points from just a month ago, to around 3.2% currently,” said the Goldman Sachs Global Economics team in a recent report. “This accounts for about half of the move in actual yields. Positioning after a strong rally has accelerated and amplified the repricing.”
Importantly, Goldman Sachs has revised their end-2011forecasts for 10-year U.S. Treasuries upwards from 3.3% to 3.75%, and made adjustments in the same direction for other major bond markets.
“We project no sustained flattening of yield curves until US unemployment is on a clearly declining trend. This is unlikely to occur until H2:11 and into 2012,” said the report.
The Goldman Sachs forecast is obviously bad news for the longer end of government bonds, but their viewpoint of short rates remaining low for another year or so means a monetary tailwind for equities for a while longer.
Source: Goldman Sachs Global Economics, December 2010.
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