Goldman Sachs Predicts 10-Year U.S. Treasury Yield Will Fall to 4.6% by 2027

Goldman Sachs predicts that by the end of 2027, the yield on 10-year U.S. Treasury bonds will fall to 4.6%, supported by rising demand for safe-haven hedges and a moderate inflation outlook, which is below market expectations.{#quote_GS}

A team of strategists led by Kamakshya Trivedi in London wrote in a research report that the current yield on U.S. Treasuries is attractive and valuations are at a "low level." However, they added that the upward pressure on yields indicates that high levels are difficult to sustain. The average expectation from a Bloomberg survey shows that the 10-year Treasury yield will be 4.82% by the end of 2027, while it reported 5.12% last Friday.

Analysts wrote: "The bullish logic for duration assets has shifted. Although surging energy prices remain a short-term risk, we still favor bond allocations even after recent increases, partly due to their hedging value."

Goldman Sachs' prediction reflects a growing bullish sentiment towards long-term bonds after a turbulent year in the fixed income market. The bank's optimistic view suggests that as funds position for next year, now may be an appropriate window for investors to lock in high yields.

Analysts believe that even if tensions in the Middle East lead to energy shocks, inflation will remain moderate, and the current market pricing of central bank rates is hawkish.

Strategists noted that previous tight energy supplies, central bank rate hikes, and ongoing spending pressures from both the private and public sectors have made bonds less reliable as a hedging tool. However, they also pointed out that fixed income assets are beginning to show value again, as widening spreads in French sovereign debt and rising U.S. Treasury yields coincide with declines in tech stocks that have strengthened German bonds.

Analysts stated that if energy shocks persist, inflation remains high, or the labor market continues to be strong, investors will still face risks.

Nevertheless, strategists mentioned that investors currently have low bond holdings, indicating room for yield declines. They added that if spending in the artificial intelligence sector slows more than expected, the drop in yields could be even larger.

Goldman also believes that the dollar's strength will fade by 2027, as the strong U.S. economy, high energy prices, and hawkish expectations for the Federal Reserve that previously supported the dollar will weaken. Strategists expect the trade-weighted dollar index to fall by about 3% next year, with the undervalued yen becoming a more attractive safe-haven asset.

"Japanese policymakers are currently also committed to curbing further depreciation of the yen and guiding funds into Japanese assets. We believe the yen will gradually become a more attractive hedging tool within pro-cyclical portfolios.",