Goldman sees half-point U.S. Fed hikes in May and June, higher yields
BNN Bloomberg
Goldman Sachs raised its forecasts for Treasury yields across the curve as it anticipates the U.S. Fed will raise interest rates by a half-percentage point at both its May and June meetings to contend with surging inflation.
Goldman Sachs Group Inc. raised its forecasts for Treasury yields across the curve as it anticipates the Federal Reserve will raise interest rates by a half-percentage point at both its May and June meetings to contend with surging inflation.
The bank sees shorter-dated yields rising at a faster pace than longer-dated ones, causing the yield curve to invert by around 20 basis points. It predicts that 2-year yields -- now around 2.29 per cent -- will rise to 2.9 per cent at the end of this year and 3.15 per cent at the end of 2023. Its 2022 forecast on 10-year yields was revised to 2.7 per cent, up from 2.25 per cent previously. The 10-year yield was around 2.49 per cent Friday.
The yield forecasts follow a steady drumbeat of comments from Fed officials who have said they would be willing to raise rates by a half-percentage point at a time if needed, a type of move the U.S. central bank hasn’t done since 2000. That has pushed up bond yields and led analysts across Wall Street -- including those at Goldman -- bracing for a more aggressive path from the Fed.
An inverted yield curve is normally seen as a warning signal of a recession. But Goldman Sachs said that while the risk of an economic slowdown has increased, a modestly inverted curve is a less definitive predictor of a recession, especially in a high-inflation environment like today’s. Inversions were much deeper in the 1970s and early 1980s ahead of a recession, it said.
“One feature of our forecast is a modest inversion of the 2s10s yield curve by year-end,” the report said. “However, we note that the nominal curve tends to invert more easily in a high inflation environment, and we could see earlier and/or deeper curve inversions this cycle. In such an environment, a deeper nominal curve inversion may be needed to produce the same recession odds in models as seen in more recent business cycles.”
Goldman Sachs’s forecast is for the Fed to end its hiking cycle with its benchmark rate at 3.00-3.25 per cent, compared with the market pricing of 2.50-2.75 per cent. The rate is now at 0.25 per cent-0.50 per cent.
