RE: GOLD.... OPPORTUNITY KNOCKS.5 Mar 2021 13:35
From GS today...
Part 1
In recent weeks, a sharp move to higher Treasury yields has triggered a sell-off in the rates market, which is starting to spill over into other assets. We sat down with Goldman Sachs Global Markets Divisionâs Josh Schiffrin, global co-head of U.S. and global interest rate products, and Brian Friedman, global head of market strats, who explain the market implications.
In recent weeks, there has been a wave of selling that has driven the yield on the benchmark 10-year Treasury note to its highest level since the pandemic began. Why did the yields move up so quickly?
Josh Schiffrin: What happened in February was fundamentally different than the factors that drove the market over the last six months. The market is now looking toward future growth and what a return to normal would look like as COVID-19 cases fall and vaccinations increase. In other words, the trade has shifted from a pure reflationary one to a view that the economy is recovering sooner than expected, and the market is reassessing the growth outlook and implications thereof. Whatâs more, the composition of the move, to the extent it continues, may be different than the pure reflation trade weâre accustomed to and in fact, is likely to reflect a more dynamic trading environment.
From your many conversations across the franchise, are you getting the sense that people are positioned for this?
Brian Friedman: Despite the marketâs focus on the reflation trade, there was a great deal of complacency priced into the market, as could be seen in historically low volatility and a very slow and shallow hiking cycle. There is a pronounced difference between the long period we were just in, where you had slowing global growth and central banks were making sure real rates globally were repricing even lower, to one now where global growth is going to be growing quite strongly and central banks will now be in the position of trying to anchor real rates from repricing too quickly. That kind of shift is going to obviously affect what assets investors are going to be long. The future period of stronger growth and allowing for higher inflation calls for the market to be long real assetsâequities, commodities and real estateâall of which have unlimited upside to growth instead of nominal assets. And as the economy and asset prices start to reflate, we expect to see higher volatility given the procyclical nature of Fed policy, and higher economic volatility emanating from enormous pent-up demand due to the pandemic and historically large fiscal packages.
What is the biggest focus from a macro perspective that youâre watching?
Josh Schiffrin: The central thing thatâs happened in the world over the last year is this terrible virus. Central banksâ stimulus and fiscal stimulus are all a response to the virusâand higher rates would reflect a return to normalcy.
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