I don’t envy Wall Street strategists this time of year. Correctly predicting the future is obviously difficult, and yet they’re expected to lay out the path forward for each asset class during the next 12 months and recommend trades to profit from those views.

To make things even more challenging, bank analysts are under increased pressure to prove their worth by making flashy forecasts that, in theory, will attract more media coverage and win more clients. That can be tough to do if their base-case is relatively boring.

This all serves as background for how it’s come to the point that Goldman Sachs Group Inc. is forecasting a “baby bear market” in bonds in 2020.

If that sounds like a borderline oxymoron, it’s because the strategists appear to be walking a fine line between being provocative (I’m writing about it, aren’t I?) while also calling for a relatively small move in the $16.5 trillion U.S. Treasury market. The group’s forecast is for the benchmark 10-year Treasury yield to “rebound to 2.25%, mostly skewed toward the second half of 2020.” The 10-year U.S. inflation breakeven rate may rise too, they say, though “levels beyond 2.0% look tough to achieve.”

To be clear, those predictions seem perfectly rational. They’re certainly in line with the market’s general stance that the Federal Reserve is firmly done with interest-rate moves after it’s “mid-cycle adjustment” that cut the fed funds rate 75 basis points. An increase in 10-year yields by about 50 basis points would suggest that the central bank was successful is staving off an economic slowdown with its three rate cuts. The benchmark 10-year Treasury yield was 2.25% as recently as May.

But couching that forecast in the language of a “bear market,” even a “baby” one, runs the risk of misleading investors on what such an increase in Treasury yields would mean.

As a reminder, Bill Gross declared “bond bear market confirmed” in January 2018 after the 10-year yield surged past 2.5%, citing broken 25-year trend lines. Jeffrey Gundlach, DoubleLine Capital’s chief investment officer, said last year to watch for the 30-year yield to close above 3.22% twice to signal the end of the bull market. It stayed above that level for two months, from early October to early December.

And yet, when the dust settled on 2018, the Bloomberg Barclays U.S. Treasury Index still posted a gain of 0.9%. The 10-year Treasury note itself was flat on the year, with the increase in yield (and drop in price) countered by interest payments. As I wrote last New Year’s Eve, the bond bear market never really came.

If you subscribe to the more traditional definition of a bear market — a decline of 20% or more over a sustained period — it wasn’t even a close call. Similarly, the “baby bear market” that Goldman envisions won’t be in the ballpark, either.

The bank’s strategists noted that in both mid-cycle adjustment episodes of the 1990s, 10-year Treasury yields moved substantially higher in the year after the final rate cut, though the slope of the yield curve from two to 10 years barely budged, meaning the maturities moved in parallel. They see that as less likely this time because virtually no one expects the Fed to raise rates anytime soon, keeping the front end of the curve locked in place.

First « 1 2 » Next