Goldman Sachs Group Inc. and Pacific Investment Management Co. say bonds are poised to fall and traders aren’t prepared for how far the Federal Reserve will raise interest rates.

“Ten-year yields are likely to go up,” Jan Hatzius, chief economist for Goldman Sachs, said at a conference in Sydney. The “bond market is underestimating to a significant degree the amount of monetary normalization that we’re likely to see.” The benchmark yield will rise to about 3 percent by year-end, he said, from 1.91 percent Thursday.

Global economic growth will subdue deflation fears, and the Fed will raise rates more than traders expect, according to Pimco, which manages the world’s biggest actively run bond fund. The company has a “small underweight” position in global bonds, according to a report Wednesday by Mihir P. Worah and Geraldine Sundstrom, fund managers at the Newport Beach, California, firm.

The two bond powerhouses are voicing the consensus outlook among economists surveyed by Bloomberg, which projects yields will rise through the course of 2016. The bearish view is reemerging after being drowned out in January as tumbling oil and stock prices sent investors rushing to the haven of government debt.

David Fuller's view

The Fed would love to be in a position, finally and sensibly, to normalise monetary policy.  This would be confirmation that Janet Yellen and even more importantly, Ben Bernanke before her had made the right decisions with their radical monetary policies.

However, the Fed is not operating in a vacuum. If the world’s largest economy were tightening while practically every other nation was stimulating monetary policy, we would have a recipe for global financial chaos in which few would be spared.

Fortunately, the Fed has succeeded in reining in the Dollar Index during the last two days, further delaying what could have been a serious crisis for the global economy (see/hear earlier comments, not least in the Audios).  The Fed’s surreptitious intervention, undertaken by the US Treasury, has knocked back Dollar bulls, increasing the possibility of another quarter-point rate hike in 2H 2016.  The somewhat less strong Dollar Index, assuming it remains below 100, has all but eliminated the risk of a US recession this year, which some forecasters feared. 

A correction in the world’s most liquid currency is also a partial reprieve for corporations and economies which were still borrowing in USD just before it rallied significantly from its multiyear lows.  It would be prudent to reduce those borrowings while the USD is softer, because it is very likely to be in a long-term recovery, supported by the USA’s technology lead, its energy self-sufficiency, and its significant number of corporate Autonomies. 

As for US Government Bonds, I agree with Goldman Sachs and Pimco (see above), although technical confirmation of this view is not currently apparent.  However, if they and I are wrong on this, for whatever reasons, stock markets will continue to have a rough year.