Goldman’s Francesco Garzarelli is out with a new interest rate forecast, in light of surging yields.
…we are revising up our 10-year yield forecasts for the US by 25bp across the forecast horizon out to end-2016. We now see yields entering 2014 at 2.75-3.00%, roughly in line with the forwards and our model estimates, and climbing to 4.00% by 2016 – above the forwards. At this point, we are not making changes to forecasts for other markets relative to those published in the June issue of our Fixed Income Monthly. This implies wider yield differentials between the US and the European and Japanese bond markets.
As to the reasons leading us to make these changes, we would advance the following observations: The tightening in global monetary conditions is coming from the US. This is not unusual. What represents a departure from previous cycles is that the shift in benchmark rates is taking place mostly from a rebuild of the real term premium, admittedly from depressed levels. All else equal, a rise in long-dated discount factors should have a more material bearing on financial assets with cash flow distributions skewed to the more distant future.
Based on our economists’ baseline projections, our macro models for government bonds say that 10-year UST yields should presently be at 2.5%, then rise to around 2.70% by year end and remain roughly at that level through 2014. If we input the Fed’s macro forecasts into our framework, leaving all else equal, yields end the year roughly at the same level, but break more decisively above 3% by mid-2014. Our new forecasts are in line with the model predictions (and the current forwards) on a 6-month horizon, and higher thereafter.
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