Goldman: Focus On The Fiscal Outlook

Goldman Sachs note that “the recent bear steepening in the U.S. has triggered an increase in client interest in the European fiscal outlook, especially as it relates to intermediate forwards such as 5y5y rates.”

• “While we do think that fiscal policy will be an important parameter for European fixed income in upcoming years, we currently see limited room for a significant sell-off on that basis.”
• “Indeed, although the term premium is low from a historical perspective, ECB cut pricing that remains relatively benign amid continued weakness in activity data mitigates curve steepening risk, in our view.”
• “Besides, we think the fiscal outlook will remain difficult to read for some time.”
• “Eventually, what matters to us is that the European fiscal stance will look much different to the one that prevailed post-GFC. But rather than taking rates significantly higher from here, we think it will contribute to stabilizing rates at a higher level than pre-COVID—in part through a larger supply of safe assets.”