Analysts at Goldman Sachs Group are closely watching the Federal Reserve’s decision to maintain its benchmark interest rate at the highest level in over two decades. They pose an important question: will the return to bond yields seen prior to the 2008 global financial crisis persist?
The economists at Goldman Sachs express greater confidence in the United States compared to other economies, stating that “resilience in the U.S. looks surer.” Although investors have expressed concern over higher interest rates, many anticipate that the central bank will cease further increases as inflation has eased from its peak in 2022.
However, Goldman Sachs warns that a prolonged period of higher bond yields could reveal vulnerabilities in the US economy. They cite potential challenges for smaller companies in accessing finance, continued pressure on credit provision by small banks, and subdued activity in mortgage, housing, and commercial real estate sectors. Despite these concerns, they do not anticipate any significant threat to the overall economic outlook.
Additionally, investor unease surrounding the US public debt profile and the impending 2024 presidential election is on their radar. Goldman Sachs suggests that market patience will likely prevail unless the elections next year result in unfunded fiscal expansion.
While long-term Treasury yields experienced a recent increase, with the 10-year Treasury note reaching 4.627% on Friday, they have also seen a decline this month. However, compared to the beginning of the year, they are still up by approximately 80 basis points.
The analysts at Goldman Sachs believe that US yield volatility is currently too high but expect it to decrease in their central forecast. They highlight that the challenge to higher returns from longer-term government bonds lies in the market’s expectation of rate cuts that they do not foresee occurring based on their baseline projections.
In summary, Goldman Sachs remains intrigued by the Federal Reserve’s decision on interest rates and its influence on bond yields. While expressing more confidence in the US economy than elsewhere, they caution against potential vulnerabilities and emphasize the significance of the upcoming US presidential election. Moreover, they believe that the market’s expectation of rate cuts is unlikely to align with their baseline forecasts.
Heightened Rate Volatility Presents Investment Opportunities
The Federal Reserve has made efforts to control inflation by raising its benchmark rate to 5.5%. As we approach the next policy meeting in December, experts are pointing out potential opportunities for ETF investors in stocks and bonds.
While the prospect of better growth, stickier inflation, and weaker fiscal positions may put pressure on yields and valuations, experts believe that concerns in these areas are likely to persist until inflation eases. Despite this, Goldman Sachs analysts note that other asset classes may outperform cash in the coming year.
Goldman predicts that the US economy will grow by 2.4% in 2023, surpassing previous consensus forecasts. Additionally, the probability of a recession within the next 12 months is estimated at just 15%, lower than the median forecast which sits at around 50%.
The analysts also highlight the potential increase in the value of bonds as a recession hedge if central banks decide to cut interest rates in response to downside growth risks. They suggest that longer-dated yields above the cash rate would make it more enticing to add duration to investment portfolios.
In summary, despite the current volatility in interest rates, there are still attractive investment opportunities in stocks and bonds for ETF investors. Goldman Sachs analysts believe that a more balanced approach to allocations may be premature, and that other asset classes have the potential to outperform cash in the future. As the economy continues to grow and inflation eases, the value of bonds as a recession hedge may rise, particularly if central banks decide to cut interest rates.