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Government bonds have been under pressure recently. And as bond prices fall, the promised returns at maturity automatically increase.
Don’t higher bond yields make bonds more attractive? ‘No!’ Chorus of CTA hedge funds jumping on every trend and riding it until it collapses. ‘Maybe!’ estimates the asset allocation team at Goldman Sachs, in a new note published today.
Most investment bank asset allocation teams generally recommend that investors overweight equities over the medium term. This could be a force of habit, but it’s more likely because returns on stock investments tend to be higher than those in other sectors.
But what about the short term? Things get trickier. Almost every investor has a different investment horizon – some measured in years, others in fractions of a second.
The approach that Goldman Sachs, like a number of other investment banks, uses to deal with this variable-horizon client problem is to publish multi-horizon asset allocation preferences. In Goldman’s case, they’re looking at three months and twelve months.
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Their short-term outlook can – and does – change. Their long-term outlook rarely changes. After a few months of holding stocks neutral over a three-month horizon, they upgraded them to overweight today.
But we thought it was interesting to see, with yields up a full percentage point year-to-date, Goldman strategists today revisiting their long-term view of how government bonds might fit into a balanced portfolio. The team led by Christian Mueller-Glissmann upgraded 10-year government bonds from neutral to overweight – in line with equities – but with numerous reservations that keep them neutral in the short term:
We believe that bonds should gradually move from portfolio status to hedge status. Although higher yields, fiscal concerns, AI-driven capital competition, and inflationary uncertainty still argue for tactical caution on duration, the combination of higher carry, improved return asymmetry, and lower expected inflation suggests more normal strategic allocations to bonds.
In other words, Mueller-Glissmann isn’t really calling out highs for global bond yields, but it looks like he’s sitting on his chair.
Does this mean water is safe for bonding of all kinds?
Rising yields have also started to weigh on credit, with corporate spreads widening and eurozone sovereign risk reassessing. . . . We are returning to the UW credit over a horizon of 3 million, in line with our allocation of 12 million.
Bad news for tech companies looking for a boost in investor confidence around new debt.
Gn bussni
