Goldman: Selloff/Consolidation More Likely Than Sharp Retracement

Goldman Sachs note that “the bond market appears to be entering a period of consolidation after a historic Q1 selloff. Historical yield behaviour since 1970, coupled with sources of upside risks to our inflation outlook, suggest further upside to our current yield targets across the curve is the more likely outcome from here. Recent steepening notwithstanding, we also believe that front end rates will continue to underperform longer maturities. To some extent, the recent steepening is simply reversing the equally sharp flattening seen in late March, and it appears more technical in nature - perhaps from hedging flow reversals and profit-taking on front end shorts. Steepeners will be more appealing, in our view, when the risks to the Fed policy rate outlook are at the very least balanced. Of course, there are other factors beyond Fed policy that affect long end pricing, but these tend to be slow moving, and in many cases work in offsetting each other, and therefore may not be significant drivers in the short run. Bond risk premia spillovers are an exception, in that the repricing could be more rapid, but we believe a big potential shift - namely, the dissipation of the drag from negative rate policy-driven bund yield declines on global bond markets - has likely already occurred.”