Goldman Lifts Treasury Yield Call as Washington Power Shifts

Goldman Sachs Group Inc. boosted its year-end forecast for the 10-year Treasury yield -- which has risen sharply this month -- to reflect the new balance of power in Washington.

Last week’s Georgia runoffs flipped the Senate, giving Democrats unified control of the federal government when President-elect Joe Biden takes office next week, which “should translate into a greater fiscal impulse than under our previous divided government baseline,” strategists Praveen Korapaty, William Marshall and Avisha Thakkar said in a note.

They raised their end-2021 forecast for the 10-year yield to 1.5% from 1.3% to reflect “revived reflationary themes” in U.S. rates. Goldman’s call come as the Senate shift triggered a selloff in Treasuries, with the benchmark yield rising by the most since June in the week of the vote. It rose on Thursday after Biden unveiled plans for a $1.9 trillion virus-relief package.

The new forecast -- along with increased targets for 5- and 30-year yields -- assumes that Democrats can deliver near-term fiscal stimulus of at least another $750 billion, which should boost growth. It also assumes earlier monetary policy tightening by the Federal Reserve in the form of reduced asset purchases and a fed funds rate increase. At the same time, the global backdrop “should limit the extent of repricing,” the Goldman analysts wrote.

Goldman Lifts Treasury Yield Call as Washington Power Shifts

Fed Chairman Jerome Powell, participating in a webinar Thursday, addressed concerns about policy tightening, saying the time to raise rates is “no time soon.” Powell also said policy makers will “let the world know” well in advance of any decision to taper bond purchases.

The benchmark 10-year yield has exceeded 1% for more than a week after idling below the threshold since March, bolstering the view that a regime shift in U.S. rates is under way. Traders are debating how high rates can climb before upsetting the global risk-asset rally. The rise in rates has also caused some observers such as Morgan Stanley and Deutsche Bank AG to reassess previously bearish views on the U.S. currency.

After ending 2020 at 0.913%, 10-year yields hit this year’s peak of 1.186% on Jan. 12. They were at 1.11% on Friday.

Coincidentally, Hoisington Investment Management Co., famous for its correctly bullish outlook on Treasuries over the past three decades, doubled down in a quarterly report, saying any increase in yields is unlikely to be sustained because conditions for higher inflation don’t exist. Similar concerns have eroded conviction in yield-curve steepening bets, prompting profit-taking after this week’s 10- and 30-year auctions drew strong demand.

©2021 Bloomberg L.P.

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