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21 Jun 2013
Flash: Sharp correction to continue? – Goldman Sachs
FXstreet.com (New York) - According to the Economics Research Team at Goldman Sachs, “The discussion about Fed tapering has triggered a sharp correction in bond markets and equities alike as investors worry about the impact of a withdrawal of QE on the sustainability of growth as well as assets that may be vulnerable to a rise in US yields.”
Of course part of the concern is natural given the sharp rise in risky assets since last summer. The focus on the prospects of a world in which central banks are no longer the marginal buyers of debt is understandable. “An environment where interest rates are close to zero and central banks are major buyers of government bonds is likely to have both positive intended, as well as negative unintended consequences. On the positive side, it has been a necessary response to the financial crisis and the credit crunch.” the team adds.
Low interest rates have helped cushion the impact of fiscal tightening in an environment of wide output gaps, particularly in the developed economies. But very low interest rates have also fuelled a manic search for yield as demand for income has increasingly outstripped supply of ‘safe’ income bearing assets. When interest rates rise it may turn out that the price of some assets is unsustainable, either because growth will fade without aggressive policy support, or because credit yields or bond yields in some parts of the world adjust upward as US risk-free rates normalize.
Of course part of the concern is natural given the sharp rise in risky assets since last summer. The focus on the prospects of a world in which central banks are no longer the marginal buyers of debt is understandable. “An environment where interest rates are close to zero and central banks are major buyers of government bonds is likely to have both positive intended, as well as negative unintended consequences. On the positive side, it has been a necessary response to the financial crisis and the credit crunch.” the team adds.
Low interest rates have helped cushion the impact of fiscal tightening in an environment of wide output gaps, particularly in the developed economies. But very low interest rates have also fuelled a manic search for yield as demand for income has increasingly outstripped supply of ‘safe’ income bearing assets. When interest rates rise it may turn out that the price of some assets is unsustainable, either because growth will fade without aggressive policy support, or because credit yields or bond yields in some parts of the world adjust upward as US risk-free rates normalize.