The giant vampire squid also known as Goldman Sachs is out with a new research report which argues that the time to buy treasuries has passed and that investors should start to buy stocks instead. According to Goldman's chief interest rate strategist Francesco Garzarelli, the 10 year has already seen its bottom at 2.5% even though rates are likely to stay low for a long time. Garzarelli said ""Being bullish on rates is going to be the wrong trade going forward" and that "equity offers much better return opportunity than bonds going forward." The prospect of more QE does not change his view because the market have already priced it in. For the record, Goldman expects the Fed to purchase $1 trillion in assets (mostly treasuries) mainly in the 2-5 year range. This action by the Fed should be beneficial for risk assets such as stocks, commodities, and the carry trade. While Garzarelli is cautious on bonds, he sees the 10 year under trading under 3% through 2011 due to the weak economy.The prediction by Goldman goes against quite a few forecasters who expect the 10 year to fall to 2% or lower. In particular, Gluskin Sheff's David Rosenberg who believes the 10 year could break below 2% in 2011.
Furthermore, Goldman does not predict a double-dip for the US economy thanks to more quantitative easing. I am not sure why Goldman is so confident that QE will prevent a double dip recession. In a recent research report, Morgan Stanley argued that a $2 trillion asset purchase program by the Fed would only: 1) lower Treasury yields by 50bp; 2) increase GDP growth by 0.3pp in 2011 and 0.4pp in 2012; and 3) lower the unemployment rate by 0.3pp by the end of 2011 and 0.5pp by the end of 2012. So in effect, QE will not do very much for the real economy, but I guess Goldman knows best.
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