Goldman Sachs: Intermediate Real Yields Are Too Low

Thursday saw Goldman Sachs note that "even as U.S. nominal yields have stabilized over the past few months, real yields have declined by anywhere from 30bp to 40bp. Given the outlook for the economy, we believe intermediate real yields are too low. There are three broad arguments that support higher intermediate and longer maturity real yields, and upside risks to that view. First, the neutral rate (r*) typically serves as an anchor for these yields, and market pricing is currently below commonly assumed levels, and appears inconsistent with inflation pricing over the same period. Second, the Fed may have to take policy rates above the neutral rate to return inflation to 2% following a period of above-2% inflation. Finally, fundamentals underlying this recovery suggest upside risk to existing neutral rate assumptions - it is important to keep in mind that there are large error bands around such estimates. Consistent with our yield forecasts, we expect 5y5y nominal yields to sell off by about 40bp over the course of the year, with the real yield component driving the larger portion of that repricing. While we don't see an obvious near-term catalyst for a reassessment in real yields, potential triggers in the coming months range from foreign spillovers into the U.S. (primarily from the Euro area) to early signs of inflation persistence and taper talk."