Goldman Sachs: Downside Risks To Intermediate/Long End Yield Forecasts

Goldman Sachs note that "new COVID outbreaks are weighing on growth; our economists expect the remaining part of the service sector recovery to be less rapid than that witnessed in the early stages. While we think there will be a slowdown, the recovery remains on track - relatively high vaccine efficacy against severe infections should mean fewer restrictions and a smaller drag on economic activity."

• "We had previously argued that markets appear to be having difficulty in separating the second derivative from level effects; both output and labor market gaps are still closing even with slowing activity, and markets have historically been unwilling to price substantial accommodation in the yield curve when the Fed is closing in on its mandates - arguing for a higher level of intermediate and longer maturity yields. Although we still believe this to be the case, recent revisions to the economic outlook suggest these gaps may take longer to close, and therefore the upward repricing yields may not be quite as front-loaded in 2021, presenting downside risks to our YE2021 forecasts."
• "The risks are largely concentrated at intermediate and longer maturities. Bull flattening of the yield curve over the past two months, after controlling for other factors, appears to imply a lower r*. While we think this market assessment will eventually prove to be incorrect, price action over the past two months suggests such a reappraisal may not happen soon. The upcoming labor market report, which our economists expect will be fairly strong, should offer some insight into the time frame - large above-trend gains could allow a faster return to higher equilibrium levels, whereas more modest gains could leave rates in limbo."