Goldman Sachs: Time To Nibble, Not To Feast

Goldman Sachs note that “remain cautious about adding longs.”

• “This is despite our belief that the risks to our yield projections are more symmetric than they have been in a while. There are a few reasons for our reluctance to go long.”
• “First, both as a result of upside risks to growth and the Fed’s reaction function, we believe there are still upside risks to our economists’ 4.50-4.75% terminal rate projection.”
• “Second, even in the event of a more immediate recession where the Fed might be expected to cut, assuming historically maximal inversion from the past five decades (excluding the Volcker period in the early 1980s) suggests only about 30-40bp of downside to 10-Year yields.”
• “Furthermore, with inflation potentially appearing somewhat elevated even in such a scenario, markets may not price aggressive Fed easing.”
• “Finally, we note that opportunity cost of staying in cash versus buying bonds isn’t that high - the short-term interest rate is soon likely to exceed the interest on longer maturity U.S. Tsys.”
• “To be sure, the rapid pace of tightening means that an accident is more likely, and so legging into some duration risk with 10y yields around 3.75-4.00%, especially in the context of portfolio “insurance,” makes sense to us.”