Goldman and Citigroup Divided on Whether Bond Rout Will Persist

Goldman Sachs Group Inc. is finding itself in a minority on the bond-market selloff. The U.S. investment bank sees the slide continuing, while rivals from Citigroup Inc. to Aviva Investors are betting the losses won’t turn into a rout.

Goldman Sachs says U.S. Treasury yields had fallen too far, too fast and that global quantitative easing is losing its potency. Those on the opposite side of the argument point out that the world’s richest economies remain in the doldrums, and there’s every reason to expect policy makers to pump in more bond-boosting stimulus.

“Let’s be clear that the selloff is a risk adjustment, not a reflection of better economic data, especially inflation,” Jabaz Mathai, a rates strategist at Citigroup in New York, said in a research note. “We don’t expect a sustained selloff like fall 2013 or spring 2015.”

The drop in bonds has been marked. U.S. 10-year Treasury yields rose the most in a month last week, and extended that move Monday to touch the highest on an end-of-day basis since June 23. Similar-maturity German bund yields also climbed to the highest since the Brexit referendum, before the result of the historic vote spurred bets that central banks would ramp up monetary easing.

The rise in yields accelerated when the European Central Bank disappointed investor expectations for an expansion of its bond-buying program on Sept. 8. That, together with growing speculation the Bank of Japan was nearing the limits of what it can purchase, stoked concern policy makers in leading economies were getting ready to call time on more cheap money.

The benchmark 10-year Treasury yield was 1.69 percent as of 1 p.m. New York time Monday, and climbed as high as 1.70 percent. That on Germany’s bund was at 0.04 percent, after rising above zero for the first time since July on Friday.

The bond-market losses are only set to continue, said Francesco Garzarelli, London-based co-head of global macro and markets research at Goldman Sachs, which sees Treasury yields rising to 2 percent toward the beginning of 2017.

The resultant drop in stock-market indexes may slow the move up in yields but not reverse it, Garzarelli said.

Citigroup predicts 10-year Treasuries will rally by year-end, with yields falling to 1.60 percent.