Goldman Sachs Anticipates Steepening of U.S. Treasuries Curve
Goldman Sachs executives have expressed their expectation of a long-term steepening of the U.S. Treasuries curve, driven by increased fiscal spending. Ashok Varadhan, co-head of global banking and markets at Goldman Sachs, discussed the anomaly of high employment and substantial spending. He mentioned that it’s hard to envision meaningfully lower long-term rates. The trading desk at Goldman Sachs predicts a more normalized yield curve, with a steeper yield curve and lower rates at the front end, but not much relief at the back end.
Factors Influencing the Curve
Concerns over escalating fiscal deficits and a surge in government bond issuance have contributed to elevated long-term Treasury yields. Fitch and Moody’s have reacted to this by issuing negative creditworthiness ratings for the U.S. government. Furthermore, benchmark 10-year Treasury yields reached their highest level since 2007, reaching the 5% mark. Demand for long-dated Treasuries has waned due to reduced participation from central banks, U.S. regional banks, and sovereign wealth funds.
Factors Affecting Demand
Jim Esposito, a Goldman Sachs executive, pointed out that central banks worldwide have transitioned from quantitative easing (QE) to quantitative tightening (QT). U.S. regional banks, traditionally significant holders of U.S. Treasuries, have become less active in recent auctions due to a duration mismatch. Additionally, sovereign wealth funds, particularly those in China, have exhibited reduced activity due to geopolitical tensions with the U.S. as well as a slowdown in international trade.
Goldman Sachs Analysts’ Perspective
Goldman Sachs analysts suggested that bond yields have likely reached their peak. The higher yields have made fixed income assets more attractive in anticipation of an anticipated easing in monetary policies in the following year.