Weekend Economists Commemorate the Dark Knight July 25-27, 2014

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19. Goldman Sees Risk of Stock Decline on Rising Bond Yields

http://www.bloomberg.com/news/2014-07-25/goldman-sees-risk-of-stock-decline-on-rising-bond-yields.html

Global equities and bonds may retreat in the next three months, with stocks at risk of a brief selloff, as rising inflation boosts yields, according to a quarterly strategy report by Goldman Sachs Group Inc.

The bank cut its rating on stocks to neutral, the equivalent of hold, for the next three months, a note to clients from its portfolio strategy group showed. Goldman Sachs also lowered corporate credit to underweight and predicted that government bond yields will increase.

“We are concerned that a selloff in government bonds will lead to a temporary selloff in equities in line with what we saw last summer, though the magnitude is likely to be smaller as the need for bond yields to correct is lower,” a group of 11 strategists, including David Kostin, Kathy Matsui and Peter Oppenheimer, said in the report, known as the global opportunity asset locator.

The MSCI All-Country World Index lost 8.8 percent from May 21 to June 24 in 2013, a period in which yields on 10-year Treasuries (USGG10YR) rose to about 2.54 percent from 1.93 percent, data compiled by Bloomberg show. The 10-year yield is about 2.46 percent now. Goldman forecasts it will rise to 3 percent by the end of 2014 and to 4 percent by the end of 2017.