Treasury yields surge likely to be capped by ‘new conundrum’ – Goldman Sachs

Analysts at Goldman Sachs believe that the bond market will be reluctant to lift the terminal rate even as the Federal Reserve hikes rates in the coming year.

Key quotes

“There are two possible explanations” for the new bond market conundrum, “a widely prevalent low terminal rate view, or that the price signal is distorted by supply/demand imbalance.”

“The imbalance between supply and demand is “a more compelling” explanation, adding that it’s “one that will take time, and some rate hikes to resolve, leaving the long end relatively sticky over the course of the year even as front-end yields reprice materially higher.”

“Goldman has increased its year-end estimate for the policy sensitive two-year note yield to 1.35%, from 1.15%, as its economists now project “three hikes by the end of 2022, and a steady three hikes per year pace thereafter.”

“Project the five-year note to end 2022 at 1.8%, the 10-year to climb to 2% and the 30-year to reach 2.25%.”