"Bond Bears Have Had A Difficult 2017" Goldman Mocks Its Clients After Cutting Its Treasury Yield Target
It has been a day of capitulation for Goldman. Just hours after the bank that controls the White House cut its forecast for Trump tax hikes by nearly 50% from $1.7 trillion to $1.0 trillion, moments ago Goldman, which starts off every single year predicting that 10Y yields will rise to 3.00% (or higher) over the next 12 months - much to our recurring mocking every single year - just cut its 10Y Treasury yield forecast for the end of the year. To be fair (to those who lost money listening to its reco) it did so kicking and screaming, with chief GS Intl strategist Francesco Garzarelli adding saying that "in relation to expectations around nominal activity growth and credit expansion, 10-year bonds now screen as expensive across the board."
Well, maybe relative to Goldman's expectations for nominal activity. Others, which as of today also include Fed's Bullard, however are watching the chart below and have realized that any hopes for an economic rebound in the remaining 7 months of the year are now long gone.
The highlights from Goldman's capitulation:
Bond bears have had a difficult start to 2017 as a combination of weakening inflation trends and increasing political risks has kept a lid on yields. Reflecting some added uncertainty on the US macro outlook, we are lowering our 2017 year-end forecast for 10-year Treasury yields by 25bp to 2.75% and making smaller adjustments to the other major markets in the same direction.
Our analytics suggest that the main driver of bond returns in recent months has been swings in term premium, and that expectations of short rates have remained fairly stable. In relation to expectations around nominal activity growth and credit expansion, 10-year bonds now screen as expensive across the board.
Looking ahead, our US Economics team continues to project a higher trajectory for Fed Funds than priced into the forwards. Expectations on the path for short-term rates in countries outside the US remain at historical lows, with markets discounting negative real rates for a very long time. The bar for positive surprises therefore does not seem particularly high to us.
Although term premium in the major markets has increased since last November, it remains very depressed by historical standards, reflecting the excess demand for bonds generated by QE policies and the spillover effects that these have across integrated capital markets. As these policies are phased out, term premium should return even if the expected path for short rates does not change much from present low levels.