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Goldman speculates stocks to decrease 25% if 10-Year Yield reaches 4.5%
Goldman Sachs Group Inc believed that in case the yield of 10-yeas US Treasury bonds hit 4.5 percent by the end of the year, the economy is likely to survive while the stock market may run into chaos.
In the Goldman’s base-case scenario, the yield of 10-year US bonds could attain 3.25 percent while the stress scenario cited by Goldman that the US bonds reach 4.5 percent can bring many volatilities to the stock market, economist Daan Struyven wrote in a note Saturday. He believed that the economy, in this case, can await a dramatic slowdown but not a downfall.
The note also said, “An increase in rates to 4.5 percent by the end of the year would instigate a 20 percent to 25 percent decrease in equity prices”. Although there are some concerns that the 10-year yield could touch 3 percent, many strategists speculate that the equities could keep increasing until bond rates hit 3.5 percent or 4 percent. It’s now is set at 2.86 percent as of 6 a.m. New York time Monday.
With a fall of 20 percent to 25 percent in stocks from the peak of the close, stayed at 2672.87 points on January 26, the S&P 500 would stay within a range of 2,155-2298 points. After falling to the low level of 2,581 on Feb.8 which is the height of volatility in the market. If the situation thrives under the Goldman scenario, the stock market will have a long period of decline.
Investors should keep in mind that Goldman’s ground speculation is for the 10-Year Treasury Note to gain 3.25% by the end of 2018 and 3.6% by the end of 2019, reported by Bloomberg and Goldman’s U.S Weekly Kickstart. Besides, Goldman plans that the S&P will attain 2850 at the end of 2018, which would show an attainment of 3.9% from the Feb.27 close, and advice that investors should purchase the S&P 500 and sell the 10-Year T-Note. Bryce Doty, a senior bond portfolio manager at Sit Investment Associates believed that the stock market, with the 10-year yield reaching a record high in 4 years, is shifting to transform in the bond market. Accordingly, the stock market has sold off and has made a flight to quality that has directed yield to decrease. Everything has changed.” You now have a stock market transforming from an uptick in yields and bonds rather than the other way around,” he added.
He also told CNBC that the current environment is “dangerous at worse, uncertain at best.” He worries about the exploding of federal budget deficits on account of a combination of the tax cut and spending increase. Meanwhile, the Fed also has the scheme to reduce its massive balance sheet.