Goldman Sachs: No worries about launching spreads

Her Eleftherias Kourtali

Goldman Sachs is not worried about the impact of rising eurozone bond yields on the sustainability of public finances in high-debt countries, saying higher borrowing costs will be offset by the emerging economy.

As the American bank notes in today’s report, the European bond market has made a rapid “turnaround”. This is a sign that the problems that plagued Europe in the last cycle – low nominal GDP growth, deflation, lack of profitability – are disappearing. Only at the beginning of December the yield of the German 10-year bond was -40 bp, and now it is at +22 bp. Bank of America strategic strategists estimate that the yield on the 10-year Bund will reach +50 basis points. the fourth quarter of 2022, which means much higher returns across the eurozone.

Following the aggressive tone of the ECB press conference last week and higher-than-expected inflation, GS economists expect the ECB to double interest rates in 2022, in September and December, zeroing the deposit rate by the end of the year. of the year. They also expect interest rate increases of 50 basis points per year in 2023 and 2024.

In terms of expanding the spreads we’ve seen these days, Goldman Sachs believes it is manageable. He points out that the risk is, of course, clear for weak countries if there is no substantial improvement in growth expectations, as the debt in southern Europe will become increasingly worrying as interest rates rise.

The spreads in Europe have already started to expand, with the Italian spread for example, reaching 150 bp. from 100 p.m. a year ago. Goldman interest rate analysts argue that, based on the distribution of macroeconomic results over the past decades, Italian financing costs should remain below 2.50-3% to ensure a declining debt trend (the current 10-year yield is 1 , 78%, so still well below this level).

This suggests that only a rise in nominal growth expectations (or permanent transfers through a fiscal union) could keep eurozone core bond yields close to around 1% and Italian spreads close to 200 bp. However, GS does not expect that we will approach these levels soon – the decrease in QE (forecasts QE to end in June, interest rates to rise in September) will mean an expansion of spreads by about 10 bp. – similar to the reaction observed immediately after the ECB meeting.

Also after the first quarter, Goldman Sachs continues to expect strong growth in Europe, which believes that it will eventually reduce the spreads close to current levels as we approach the rise in interest rates.

For Goldman, higher interest rates also mean that investors should remain overweight on “value” stocks such as energy and telecommunications, and especially on European banks.