Bond investors not fooled by Goldman Sachs’ market assessment

By: Damian Wood
Damian Wood
As an experienced trader, I work for myself managing my own small portfolio and also contributing on several investment news sites.… read more.
on Jan 7, 2020
Updated: Mar 11, 2020
  • Risk-on investors have been shifting to government bonds triggering a sharp decline in the US government debt.
  • A few months after Wall Street warned of a looming recession, Goldman Sachs released a report claiming the US is virtually recession-proof for the next few years.
  • Analysts say the report by Goldman seems to have ignored an apparent recession in the American manufacturing sector, and how it is “infecting” other areas of the economy.

Following the assassination of Iranian general Qassem Soleimani on Friday last week, bond investors have been shifting to government bonds triggering a sharp decline in the US government debt.

It would appear the high risk associated with bonds that boosted the stock markets last year is slowly wearing off despite the Fed’s intervention.

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Since Jan. 1 to date, the benchmark 10-year Treasury yield has dropped 10 basis points. The benchmark always has an inverse relationship with prices and according to CNBC, the yield stood at 1.786% by the close of business last Friday and was last seen drifting around 1.80%.

Last month risk-on investors rallied behind stocks. Government bonds, usually considered hedges against risk, dropped as a result.

Despite a correction from last year’s summer inversion, the yield curve is still gearing up for an economic downturn. It’s almost always a guarantee for a recovery to follow an inversion in the yield curve. Together, these theories project a recession at least by 2021.

Now, about six months ago, Wall Street warned of a looming recession, a red flag that Goldman Sachs would later dismiss, terming it a “false alarm”. The US Investment bank released a report claiming the country’s economy was virtually recession-free at least for the next couple of years.

According to CNBC, the Goldman said: “Overall, the changes underlying the Great Moderation appear intact, and we see the economy as structurally less recession-prone today … While new risks could emerge, none of the main sources of recent recessions — oil shocks, inflationary overheating, and financial imbalances — seem too concerning for now. As a result, the prospects for a soft-landing look better than widely thought.”

The bank stated that the “Great Moderation” foundation that started in the 80s and advocated for reduced inflation, low volatility, and sustainability in economic growth remains robust.

But according to a Friday publication by the Institute of Supply Management (ISM), manufacturing production dropped for the fifth consecutive month in December last year.

The report by Goldman seems to have ignored an apparent recession in the American manufacturing sector, and how it is “infecting” other areas of the economy.

The analysis further downplays the need for the Central Bank to pump cheaper credit into the economy.

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