Goldman Sachs says higher real yields ‘exacerbated’ the stock market sell-off

Goldman Sachs trading booth on the floor of the New York Stock Exchange in New York, on Thursday, January 6, 2011.

  • Goldman Sachs said in a note Monday rising real yields on US 10 year Treasuries could have “exacerbated” the recent sell-off in US stocks. 
  • The bank said while real yields have risen, nominal yields have hardly moved, not serving as a diversification tool for investors. 
  • “Performance has been negative for most assets resulting in diversification desperation: both bonds and gold did not provide a good hedge for equities – only the dollar rose,” Goldman said. 
  • The bank said the first of three television debates between incumbent president Donald Trump and Democratic opponent Joe Biden is likely to move markets. 
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The wave of bearishness that has engulfed the US stock market, putting it on course for its first monthly drop in six months, was worsened by a rise in inflation-adjusted Treasury yields, Goldman Sachs said in a note Monday. 

The bank said markets have been in “risk-off” mode in recent weeks, due to a combination of rising COVID-19 cases in Europe, doubts a vaccine will be available by the first quarter of 2021 and fears that more fiscal stimulus won’t be coming before the US presidential election. 

But Goldman said the stock market sell-off was also worsened by rising US-10 year real yields, which strip out the effects of inflation.  Growth concerns have weighed on inflation expectations and “pushed real rates higher, with US 10 year nominal bonds roughly unchanged,” the bank said. 

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The bank added this has resulted in a “diversification desperation” where neither bonds nor gold provided a hedge for equities and play their traditional roles of acting as safe havens. 

Gold has fallen about 5% to a two-month low slipping below $1900 per ounce, while US-10 year nominal treasury yields and the Japanese yen also another safe haven have hardly moved. The dollar has risen roughly about 2% against emerging currencies. 

Real 10-year Treasury yields were last at -0.94%, up from -1.08% at the start of the month, at their highest since late July, mirroring the gains in the dollar index, according to Treasury Department data. Nominal 10-year yields have fallen by just 5 basis points this month to around 0.65%.

Real yields have risen in September after a monetary policy strategy unveiled by the Fed last month that targets inflation has not convinced markets that it would be successful in encouraging a rise in consumer prices. The central bank said last month it will now target an inflation rate that averages 2% over time. 

The current rate of headline consumer inflation is 1.3% and the central bank’s preferred measure of inflation, so-called “core PCE”, is at 1.25%. 

Goldman joins JPMorgan in saying safe-haven assets posted their worst performance in a decade this September even though the stock market has seen its biggest monthly drop in six months. 

“The performance of safe assets this September has been the worst in at least a decade during a major equity market drawdown,” JPMorgan strategists said this week. 

“S&P 500 correlation with US 10y TIPS yields has turned sharply negative once again given the fading growth support,” Goldman said. 

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The bank said more optimism on growth and inflation is needed to “breakout on a more sustained basis”. 

This will likely be caused by falling uncertainty around the US election and positive vaccine developments. 

The bank said implied volatility is high across assets, meaning that markets are pricing in uncertainty and volatility beyond the November 3 Election Day. 

Goldman particularly said the first of three televised debates between incumbent Republican candidate Donald Trump and Democrat opponent Joe Biden later in the day could move markets. 

“The first Biden-Trump debate [today] might be an important catalyst for investors to assess risks,” Goldman concluded. 

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