Goldman Slashes Global Bond Yield Forecasts; Expects Inversion In Front End Of Curve

In the latest admission by Goldman that its economic outlook was, as usual, unrealistically sunny, one day after the bank took down its oil price forecasts, overnight Goldman Sachs also slashed its global bond yield forecasts to reflect "material weakness in growth data, combined with poor risk sentiment and tighter financial conditions."

This comes alongside a new revision in the bank's rate hikes for 2019, which it now sees at just 1.1 on a "probability-weighted basis", down from 4 as recently as a month ago, to wit:

Since their recent peaks last October, global yields across G10 economies have seen a marked decline, with 10y yields declining by anywhere from 15 to 70bp. Much of this has coincided with a sharp drop in equities, suggesting a material reassessment in the growth outlook next year. To be sure, our economists had already expected a somewhat tepid pace amongst major non-US economies, but recent activity data out of China and Europe have been weaker than expected. We have also had reassessments elsewhere. Our US economists have revised down growth forecasts for the first half of 2019 from 2.4% to 2% (though they continue to expect 1.75% in 2H19). This revision comes on the back of weaker-than-expected data (with our Current Activity Indicator dropping from 3.5-4% last summer to a 2-2.5% range) as well as tighter financial conditions. As a result, our modal funds rate call has also been revised downward, from four hikes next year at the early November publication of our outlook, to two hikes in 2019, and a probability-weighted expectation for the net number of hikes of 1.1

The bank's new 2019 year end forecasts are lower everywhere, from 15bp lower for German 10y yields (to 0.65%) to 50bp lower for US 10y yields, which the bank now sees inching to 3.00%, down from 3.50% previously. The forecast for Canadian yields saw the biggest revision, down 60 bps to 2.40% yet even the revised forecasts are still considerably above current forwards the bank notes. Goldman also notes that "these point forecasts could prove somewhat unstable, given the elevated level of uncertainty about economic outcomes." U.K. and Japanese expectations were also downgraded. Goldman revised down its 10-year gilt yield forecast by 25 basis points to 1.85 percent, with Japan’s lowered 12 basis points to 0.1 percent.

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