Goldman Warns of a ‘Baby Bear’ Market in Bonds for 2020

Despite expected Fed inaction next year, a strong economy will lift interest rates, the firm forecasts.

Market predictions for next year are pouring in from Wall Street, but the most arresting is from Goldman Sachs, which predicts a “baby bear” market in bonds. If so, that would mark a disruption in long bull run in bonds, which began in the 1980s with the fall of interest rates from double-digit levels.

To call bonds’ potential trajectory in 2020 any kind of a bear market, baby or not, may be overstating things. While the investment firm is upbeat about the economy next year and the stock market, it noted in a report that the Federal Reserve may be done easing, which ordinarily would limit price gains.

Still, Goldman strategists went on, an improving economy stands to push interest rates higher, which of course spells lower bond prices. “So although we are cautiously optimistic on the global economy, we forecast only moderately higher 10-year Treasury yields next year,” they wrote. 

Right now, the bond market—as reflected by the Bloomberg Barclays US Agg—is up 8.6% in 2019, not even close to the S&P 500’s muscular rise, 24%. Goldman contended that the yield on the benchmark 10-year Treasury likely will climb to 2.25% by the latter half of next year.

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Nevertheless, that level is nothing new for the 10-year of late. It last was at that point in May. The T-note’s peak this year was in January, when it was just below 2.8%. Perhaps that’s why the firm appends the term “baby” to the downbeat bond market is foresees.

As their report explained, “With the Fed on hold and inflation unlikely to take off, we would discourage positioning for a major bear market.” Investors would do better to short bonds in Europe, where credit conditions are shakier, the report advised.

In the US bond market, Goldman advocated easing off of high-yield bonds, as lower earnings and high corporate leverage disconcert the firm’s strategists.

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Uh-Oh, High-Yield Bond Downgrades Expand


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