Goldman Sachs: Risky 2020 Could Bring Mini Bear Market for Bonds

A better-than-expected economy is being anticipated by global investment firm Goldman Sachs, which could lead to a mini bear market for bonds. A move higher in interest rates could feed into bond weakness, but nothing comparable to a landslide in prices.

“We are optimistic about US growth, but the mature business cycle limits the possible upside beyond the very near term. There are also plenty of risks, including the trade war and the possibility that the next Congress will reverse the 2017 US corporate tax cut,” they wrote in a report.

The Federal Reserve alluded to the possibility of no more rate cuts in its last interest rate policy meeting. The data-dependent central bank could pump the brakes on rate cuts should the economy exhibit growth in 2020.

“We expect moderately better economic and earnings growth, and therefore decent risky asset returns” across regions, they wrote.

Furthermore, the firm is optimistic about global growth albeit not overly exuberant with a slight rebound in Treasury yields.

“So although we are cautiously optimistic on the global economy, we forecast only moderately higher 10-year Treasury yields next year, targeting a rebound to 2.25%, mostly skewed toward the second half of 2020,” the firm added. The 10-year was at 1.76% Friday.

This, of course, should also feed into a stronger dollar should rates move higher in 2020.

“With the Fed on hold and inflation unlikely to take off, we would discourage positioning for a major bear market in US rates next year, even with somewhat better growth,” they wrote.

Broad Bond Exposure

Investors who want broad exposure to bonds can look at the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG). What’s under the hood of this ETF that gives investors the much-needed core bond exposure, especially in what could be a risky 2020?

Fund facts:

  • AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
  • The index measures the performance of the total U.S. investment-grade bond market.
  • The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.

Reasons to use AGG:

  • Broad exposure to U.S. investment-grade bonds
  • A low-cost easy way to diversify a portfolio using fixed income
  •  Use at the core of your portfolio to seek stability and pursue income

For more market trends, visit ETF Trends.