Goldman Tweak Tsy Yield Calls

Late on Thursday Goldman Sachs noted that “since their mid-October peak, sovereign yields have declined across the curve. The initial phase appeared to have been driven by a reset lower in growth expectations, but more recent declines have been driven by heightened anticipation of significant policy easing, which has in turn been driven by faster-than-expected cooling of inflation.”

• “Central banks’ (particularly the Fed’s) intense focus of inflation progress has aided this move.”
• “Our economists see a front-loaded rate cut schedule in the US. We now see 2-year and 10-year USTs end 2024 at 3.70% and 4.00% respectively. Our projections show the trough in 10y UST yields in the middle of the year, at 3.75%, and bouncing over 2H24 on a combination of real and inflation risk premium repricing, as well as from fading downside risks to growth. Following our revisions, we now expect yield curves to steepen beyond what is priced in forwards.”
• “Our 10y UST projections in the outer years (2025, 2026) are stable at 4%. This implies, assuming the Fed does ease all the way to 3.25-3.50%, roughly 70bp of term premium, which we believe is fair under our baseline economic projections. However, we believe there may be some upside risks here.”