Thursday, September 17, 2009

Sometimes Being a Contrarian on Bonds Means Agreeing with Goldman Sachs

From Mortgage Insider, with the quote within the post in bold:

Goldman sees 10-year yields falling to 3%
September 17th, 2009, 7:02 am · 1 Comment · posted by Mathew Padilla
In my last post, I noted the possibility mortgage rates could rise in January, if the Federal Reserve stops buying mortgage-backed securities as planned. But 30-year fixed mortgage rates are indirectly linked to 10-year Treasury notes, and Goldman Sachs sees their yield at “risk” of falling toward 3% amid low inflation. Here’s more from Bloomberg:

The U.S., the U.K. and Australia will be the “main beneficiaries” of a rally in longer-maturity government bonds, Francesco Garzarelli, chief interest-rate strategist in London at Goldman Sachs, wrote in a research report. Australian 10-year securities are the “cheapest” among markets tracked by Goldman and should trade at yields below 5 percent, he wrote.
“We see risk skewed in the direction of 10-year yields breaking towards their 200-day moving average of 3 percent, from their current 3.4 percent level,” Garzarelli and Michael Vaknin wrote in a separate note to clients. “The global bond premium remains elevated, although off the June highs, and there is plenty of excess liquidity in banks balance sheets which needs to be put to work.”

Inflation risks are subdued by high unemployment and under utilization of industrial capacity. But with a weak dollar, big government deficits, and the Fed spreading money around the inflation threat should not be ruled out. So 3% Treasury yield is probably less likely than Goldman suggests.

(End of Mortgage Insider's post)

DoctoRx here again. I present the above this way because no matter how bright Mr. Padilla, the blogger is, I submit that Goldman is well aware of all his points. Goldman is also well aware that yields have always bottomed after recessions end, often in conjunction with a stock market relapse. The contrarian in me would be alarmed if Mr. Padilla had argued that Goldman was not bullish enough on yields fall and instead had argued with David Rosenberg for a challenge of the December 2008 low around 2.1%. Now, the contrarian in me says that Padilla is with the majority that sees blue skies for the economy and lots of inflation pressure.

A 10-year yield bottom in the 3-3.1% range smells very reasonable to me.

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