Goldman Sachs – Long-Term Treasury Yields Keep Rising. The 10-Year Could Climb to 1.5%.
Even after weaker-than-expected data on inflation and the labor market, long-term Treasury yields are rising again on Friday.
The 30-year yield was up four basis points, or hundredths of a percentage point, to 1.99% in Friday afternoon trading. The benchmark 10-year yield was up three basis points to 1.19%, as the
traded 0.1% higher.
It is the second time this week that the 30-year bond’s yield has traded around 2%. While there has been plenty of macroeconomic news since it breached 2% on Monday, not all of it has been good. There has been upbeat vaccine news, but inflation data missed estimates, and the latest week brought more initial jobless claims than expected.
Yet many strategists and economists think that long-term Treasury yields have further to climb. For example, Oxford Economics strategists wrote in a Feb. 12 note that they expect the benchmark 10-year yield to climb another 30 to 40 basis points in the next three months. That would leave it around—or above—1.5%.
That is because investors expect higher and more persistent inflation than other periods in the past decade. As Federal Reserve Chair
discussed this week, the central bank has decided it will let inflation run above its 2% target to make up for weakness in recessions.
When it comes to the global economy, higher inflation “may be of limited consequence,” Oxford Economics wrote. But “for markets, the implications are likely to be nontrivial.”
The most severe impact on markets would likely be losses in high-rated corporate debt, they wrote. They took a newly bearish stance on investment-grade corporate bond markets this week, downgrading it to Underweight from their prior neutral position at Market Weight.
Stocks, in their view, may face some bumps from higher yields, but may not face persistent risk of declines. U.S. equities have been in focus as a potential loser from rising yields, but the strategists see any Treasury-related declines as an opportunity to buy shares in Europe and emerging markets, where stocks are trading at less expensive valuations.
“As long as the rise in [inflation-adjusted] yields is gentle as we expect, then we see no major inflection point in equities and other risk assets,” they wrote. “Any dips should be bought and largely in non-U.S. markets.”
Wall Street strategists say that the speed of the rise in long-term yields will be key to determining the outlook for stocks. Strategists at
said in a recent note that a 36-basis-point increase would be required in the span of a month to affect stocks significantly.
And the Oxford Economics strategists do say that there is a significant risk to global markets if there is “a disorderly rise in long-end yields driven by a spike in real yields.”
That is not what they expect, however. So for now, they keep their bullish Overweight rating on global equities, and hold a neutral Market Weight rating on U.S. stocks.
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