Bonds are looking attractive and set to beat cash, says Goldman Sachs

Bonds are looking attractive and are set to beat cash over the next year as inflation cools and central banks end policy tightening, according to Goldman Sachs Group’s head of asset allocation strategy.

The Wall Street Bank recently shifted its bond recommendation to ‘neutral’ from ‘underweight’ — for the first time since June 2020 — though has so far stopped short of an ‘overweight’ call. Still, now might be the time to begin buying, said Christian Mueller-Glissmann.

“Bonds are starting to offer an attractive entry point,” said Mueller-Glissmann in an interview. “Central banks are very close or already at the end of their rate-hiking cycle. We also recognise the pressure that comes from rising long-dated bond yields on the economy. Those factors set investors up nicely for a much better starting point for buying bonds.”

The comments come in a week that saw a global bond rally as markets bet the US Federal Reserve and Bank of England are done with rate hikes. Mueller-Glissmann joins others turning more positive, such as Bill Ackman and Bill Gross, though some such as Franklin Templeton are cautioning against prematurely declaring this year’s rout is over.

Goldman Sachs strategists see 10-year Treasury yields at around 4.6 per cent over the next 12 months, just below their current level after this week’s sharp fall. That happens to be close to the 300-year average, said Mueller-Glissmann.

“It is a sign that bond yields are closer to ‘normal’ after the last cycle being quite unusual for bond markets,” he said.

There will be times when the 10-year yield will overshoot this target, especially when data surprise on the upside and when there is renewed concern about bond supply, but those moves are likely to be temporary, he said. “We expect bonds to outperform cash over the next 12 months,” he said.

This year’s surge in Treasury yields, which hit a 16-year high above 5 per cent last month, have reduced the impetus to hike again, Fed officials said after leaving rates on hold on Wednesday. That’s in line with Goldman Sachs’ analysis, with its economists estimating the rise in long-dated yields since August has been equivalent to around four rate increases, Mueller-Glissmann said.

Still, the bank held back from recommending an ‘overweight’ position on bonds in September because it doesn’t see an economic slump in the US, he said. The private sector remains healthy with strong balance sheets, the labour market is still solid, and large US fiscal deficits are underpinning growth.

“We expect a deceleration of US growth in the fourth quarter,” he said, seeing a “material slowdown” to around 1.5 per cent-1.7 per cent. “But it’s not going to be a recession.”