Goldman Sachs Group Inc. says investors should position for continued flattening of the Treasuries yield curve into 2019 as the Federal Reserve will keep hiking interest rates.
Analysts including Charles Himmelberg recommend wagering that the gap between 2- and 30-year Treasury yields will narrow, predicting it will move from about 50 basis points now toward zero next year. The view was among those detailed in a note on Goldman’s top market themes for 2019, released Thursday.
“The 2y30y curve has steepened to +50bp after reaching a local low in August, but should trend toward zero as the Fed brings rates closer to levels consistent with (or slightly above) market perceptions of neutral rates,” Goldman analysts wrote.
The firm’s economists predict the Fed will raise rates next month, and then expect the once-per-quarter pace to extend into next year.
“A relatively steady Fed -- even in the face of slowing growth and possibly more volatile markets -- would likely result in additional yield curve flattening in the U.S., as the FOMC pushes up front-end rates but bond yields remain anchored to medium-term economic fundamentals,” they wrote.
In a separate note Thursday detailing the bank’s best trade ideas, which included the 2-to-30-year curve flattening, Goldman analysts cited two possible risks to the position.
Yields potentially becoming more sensitive to elevated supply -- causing the gap between 5- and 30-year yields to be steeper than usual -- was one. The other was that “a sizable exogenous shock to U.S. economic momentum in the next few months could cause the front end of the curve to rally.”