GS Goldman Sachs Group Inc

By Daniel Kruger 

One of Wall Street's most-prominent bond bears now thinks yields have peaked.

Goldman Sachs economists said Tuesday that weakening economic data combined with tighter financial conditions and investors' diminished appetite for risk have led the firm to lower its forecasts for interest-rate increases and U.S. government bond yields.

Benchmark Treasury yields, which help set borrowing costs for consumers, businesses and state and local governments, may have reached their highs for this economic cycle, the economists said in a report Tuesday.

They predict the yield on 10-year Treasury note will end 2019 at 3%. That is higher than Tuesday's close of 2.716%, though lower than the multiyear high of 3.232% reached in November.

Goldman also lowered its forecast for government-bond yields around the world, including in Australia, Germany, and Japan. Yields fall as bond prices rise.

Goldman Sachs' forecast is significant because the firm, until recently, had been one of the more hawkish forecasters of Federal Reserve policy. In November, economists at the firm had predicted policy makers would raise interest rates four times this year. At its meeting last month, Fed officials lowered their own forecast, penciling in two rate increases in 2019, down from the three they predicted in September.

The Fed's tone has moderated recently, and Goldman expects policy makers to adjust their approach should data show signs of economic weakness. Because investors' risk appetite has waned recently, Fed officials and central bankers around the world are likely to adopt a more cautious tone in their efforts to adopt more traditional monetary policies, Goldman's report said.

Goldman also expects that the U.S. dollar will weaken against other currencies as the Fed adopts a slower pace of rate increases, the firm said in a separate report. The dollar's climb last year surprised many investors, spurred by a U.S. economy that grew faster than those of many other developed nations and four rate increases. Higher interest rates typically attract investors to a currency.

Other investors and analysts have also said yields may already have reached their highs. Bank of America recently lowered its 2019 forecast for the yield on 10-year Treasurys to 3%, and is predicting the Fed will raise rates two more times. Janney Montgomery Scott recently said the Fed is likely to pause and may halt rate increases, the credit cycle is turning and intermediate to longer-term interest rates have likely peaked.

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Write to Daniel Kruger at Daniel.Kruger@wsj.com

(END) Dow Jones Newswires

January 09, 2019 08:14 ET (13:14 GMT)

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