Goldman Explains Why The Bond Selloff Is 'For Real'

Wall Street Journal screengrabFrancesco GarzarelliGoldman Sachs recently declared that the sell-off in Treasury bonds is for real.

They’re convinced bond prices are heading lower, which means interest rates are heading higher.

“Our bond valuation models (Sudoku and GS Curve) and a separate study of the determinants of US Treasury yields which explicitly accounts for the impact of QE, policy ‘guidance’, uncertainty and the European crisis indicate that intermediate yields should be trading in the upper half of this range, given the decline in systemic risks and the brightening US economic outlook,” wrote Goldman’s Francesco Garzarelli and Silvia Ardagna in their note. “Our model estimates (and, consistently, our forecasts) show 10-year Treasuries reaching 2.5% in the second half of this year, with German Bunds trading at 1.75%.”

Garzarelli spoke with the WSJ’s Katie Martin about the call.

He noted that interest rates won’t rise straight up, but that there would be “speed bumps” along the way.  This is why Goldman recently told clients to take some profits on their short positions.

Nevertheless, Garzarelli continues to be convinced that rates are heading higher.

Here’s the video via

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