Goldman has hacked its government bond yield forecasts

Screen Shot 2015 03 26 at 9.34.11 AMBloombergThe 30-year bond yield

Goldman has slashed its forecasts for major government bond yields.

Bond yields (which rise when prices fall and vice versa) in many Eurozone countries have tumbled into negative territory this year and US Treasury yields have also fallen, in contrast to most expectations.

And now Goldman, which has recommended investors go long stocks and short bonds, has pared back its expectations for just how much bond yields will rise this year.

Here’s Goldman:

“We maintain our strategic view that bond yields will rise progressively over the course of this year, outpacing the forwards, which are now very flat. To reflect the lower starting point, we are pulling down our year-end forecasts for the 10-year benchmark bond in the major regions. Specifically, we now expect 10-year Treasuries to end 2015 at 2.5% (from 3.0% previously), German Bunds at 0.5% (from 0.75% previously), UK Gilts at 2.00% (from 2.50% previously) and JGBs at 60bp (from 80bp previously).”

And here are three reasons why long-dated US bonds will continue to perform well:

  • The ‘neutral rate’ that balances the supply and demand of savings has fallen because of secular stagnation (Garzarelli notes that Goldman doesn’t subscribe to the ‘secular stagnation’ thesis.)
  • Some investors like insurance and pension funds are unable to sell the long bonds in their portfolios because of regulations and investment guidelines, forcing them to lock in lower yields.
  • The European Central Bank and the Bank of Japan are buying long-dated bonds to weaken their currencies and support their economies.

On Thursday morning, the yield on the benchmark US 10-year note was at 1.95%, while the 30-year bond was at 2.5%.

Here’s are Goldman’s full end-of-year forecasts by country:

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