Goldman and Citigroup Divided on Whether Bond Rout Will Persist

People Getting More Cautious Holding Treasuries: Diebel
  • Garzarelli of Goldman sees Treasury yields at 2% by early 2017
  • Aviva, Aberdeen join Citigroup in seeing no extended losses

Goldman Sachs Group Inc. is finding itself in a minority on the bond-market selloff. The U.S. investment bank sees the slide continuing, while rivals from Citigroup Inc. to Aviva Investors are betting the losses won’t turn into a rout.

Goldman Sachs says U.S. Treasury yields had fallen too far, too fast and that global quantitative easing is losing its potency. Those on the opposite side of the argument point out that the world’s richest economies remain in the doldrums, and there’s every reason to expect policy makers to pump in more bond-boosting stimulus.

“Let’s be clear that the selloff is a risk adjustment, not a reflection of better economic data, especially inflation,” Jabaz Mathai, a rates strategist at Citigroup in New York, said in a research note. “We don’t expect a sustained selloff like fall 2013 or spring 2015.”

The drop in bonds has been marked. U.S. 10-year Treasury yields rose the most in a month last week, and extended that move Monday to touch the highest on an end-of-day basis since June 23. Similar-maturity German bund yields also climbed to the highest since the Brexit referendum, before the result of the historic vote spurred bets that central banks would ramp up monetary easing.

The rise in yields accelerated when the European Central Bank disappointed investor expectations for an expansion of its bond-buying program on Sept. 8. That, together with growing speculation the Bank of Japan was nearing the limits of what it can purchase, stoked concern policy makers in leading economies were getting ready to call time on more cheap money.

The benchmark 10-year Treasury yield was 1.69 percent as of 1 p.m. New York time Monday, and climbed as high as 1.70 percent. That on Germany’s bund was at 0.04 percent, after rising above zero for the first time since July on Friday.

The bond-market losses are only set to continue, said Francesco Garzarelli, London-based co-head of global macro and markets research at Goldman Sachs, which sees Treasury yields rising to 2 percent toward the beginning of 2017.

The resultant drop in stock-market indexes may slow the move up in yields but not reverse it, Garzarelli said.

Citigroup predicts 10-year Treasuries will rally by year-end, with yields falling to 1.60 percent.

No Destruction

The economy is the basis of the other side’s argument. U.S. inflation was just 0.8 percent in July, while in the euro zone it was 0.2 percent last month. Below-forecast August payrolls data, which came on the heels of a surprise manufacturing slowdown, are seen as having reduced the chance of an interest-rate increase in the world’s largest economy, which should help bond prices recover.

“Growth is low and going to stay low and inflation is not really a problem,” Charles Diebel, the London-based head of rates at Aviva, said Monday in a Bloomberg TV interview with Manus Cranny and Nejra Cehic. “That’s not an environment where bonds get destroyed. It may be that their valuations are relatively rich and we’re experiencing a correction, but we’re not talking about the start of a huge bear market.”

Aberdeen’s View

The chance of the Fed raising rates at its Sept. 20-21 meeting fell to 26 percent, from 30 percent on Friday, while the prospect of a December hike slipped to 59 percent, from 60 percent, according to Fed fund futures compiled by Bloomberg.

Fed Governor Lael Brainard counseled continued prudence in tightening monetary policy in a speech Monday, even as she said the economy is making gradual progress toward achieving the central bank’s goals.

The bond meltdown in 2013 was part of the so-called taper tantrum, when the Fed pared its own QE program, causing debt yields to rise around the world. The selloff last year was spurred by speculation record-low borrowing costs weren’t sustainable.

Aberdeen Asset Management Plc echoes Goldman Sachs’s argument that QE may be reaching its limits, but says that doesn’t mean investors should expect an extension of the bond losses.

“This is possibly one of the signs of getting to the end of effectiveness of monetary easing,” said Luke Hickmore, an Edinburgh-based senior investment manager at Aberdeen, which oversees about $400 billion. “I am still in the camp that says growth is low, inflation is low. That fundamentals haven’t really changed.”

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