LIVE MARKETS-Deciphering the bond market's unusual selloff
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DECIPHERING THE BOND MARKET'S UNUSUAL SELLOFF
Goldman Sachs has weighed in on the recent surge in 10-year Treasury yields - a puzzling development given the Federal Reserve's rate cuts.
While the speed and size of the selloff is unusual, analysts at the Wall Street bank note that it's not unprecedented. They cite similar episodes in the early 1980s and mid-to-late 1990s.
According to Goldman, the market has priced in a large and sharp growth upgrade, along with a hawkish policy shock, which they say is "broadly sensible" given the macro conditions.
Looking at historical episodes where yield moves echoed the current cycle, Goldman sees two potential outcomes going forward.
"The first is the possibility that the Fed has eased into a non-recessionary economy, and so growth pricing holds up or even improves after the start of easing. The second is the possibility that the Fed eases, discovers that the inflation problem has not abated, and policy re-tightens - resulting in a large hawkish policy shock to markets that eventually translates into a negative growth shock as the economy slows further."
Goldman views the first scenario as supportive for risk assets, while the second clearly isn't.
"The market outcome now hinges on whether inflation resurgence is a real risk - absent broad-based tariffs, we do not expect that to be the case. So we think this should remain a supportive backdrop for risk assets, especially as we think there is now room for some relief from hawkish inflation/policy pricing," they conclude.
(Danilo Masoni)
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