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Goldman: This US Treasury Sell-Off Is for Real

Friday, 31 May 2013 | 5:19 AM ET
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With yields on government bonds jumping in the past week, Goldman Sachs has warned that a widely predicted bond sell-off is finally happening, while a major U.S. asset manager has warned investors to move out of long-duration bonds to avoid heavy losses.

Pessimistic growth targets, a fear of the Federal Reserve curtailing asset-purchases, and uncertainty over Japan's "Abenomics" policies are the three key reasons that Goldman Sachs cited for the move higher in yields.

"The bond sell-off: It's for real," Goldman's fixed income analysts said in a research note released on Friday. "Our end-2013 forecast for 10-year U.S. Treasurys remains 2.5 percent, above the forwards, and we will be looking for other opportunities to trade the market from the short side."

(Read More: Goldman Sachs: Keep Calm and Carry On Buying)

The yield on a 10-year benchmark Treasury hit 2.17 percent on Tuesday, the highest level in over a year. Investors fear the Federal Reserve, the biggest buyer of U.S. government bonds in recent years, will start tapering its purchases as the economy improves. (Bond yields and prices move in inverse to each other.)

"We estimate that the direct effect of a shift in expectations around the duration and magnitude of QE3 would be relatively contained. But there could be larger effects from a 'present valuing' of the shrinking Fed balance sheet in the more distant future," Goldman analysts said.

(Read More: CNBC Explains: Quantitative Easing)

Over the past week, the yield on 10-year bonds have risen 10 percent, stabilizing at around 2.0745 percent on Friday. Ten-year Japanese government bonds (JGBs) have hit 1 percent this week, and German 10-year bund yields have also risen.

"Anyone who has too many bonds with too much duration is going to hurt. And that's what markets are like," Jim McCaughan, chief executive officer of Principal Global Investors, which has $281 billion in assets under management, told CNBC Friday.

(Read More: Yields Rise to Highest Level in Over a Year)

"There are lots of investors who hold bonds, hold bond funds that have done very well over the last ten years by having long duration. When rates go up those funds are going to get hit. So I think you have to be very wary of funds that are heavily in high quality bonds, whether investment grade or Treasury, who have much duration."

Bearish Market for Bond Yields
Michael Gurka, Managing Director at Spectrum Asset Management says rising bond yields are going to keep bond vigilantes busy.

McCaughan predicts 10-year Treasury yields will hit 2.20 percent level by the second half of this year and he sees an end to central bank liquidity by the first quarter of 2014.

"I think a lot of the talk about carnage is coming from bond investors who have too much duration in their portfolios and they are right to be scared," he said. "You really need to have a change of track."

(Read More: Japan Bond Yields Spike—10-Year Hits 1%)

Meanwhile, Coutts - the private bank to Britain's queen – has also predicted 10-year Treasury yields will rise to 2.30 percent.

"We would be re-entering territory not visited since the third quarter of 2011, when the top end of the trading range neared 4.0 percent," Coutts said in a research note released on Friday.

By CNBC.com's Matt Clinch; Follow him on Twitter @mattclinch81

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