Goldman Sachs Predicts Turn For Emerging Markets
Thirty-year Treasuries logged their first back-to-back weekly gains since August as the prospect that the Federal Reserve will raise interest rates next month and declining oil prices dimmed inflation prospects.
Meanwhile, Goldman Sachs Group predicted emerging markets are about to turn the corner as economic growth accelerates. Higher interest rates reflect confidence in the strength of the U.S. economy, a major export market for emerging nations.
Minutes of the Fed’s October meeting, released this week, showed policymakers sought to signal a possible rate boost as soon December and that additional increases would occur gradually. The Fed’s message, combined with falling commodity prices, drove longer-dated Treasuries to outperform. Those maturities are most sensitive to inflation prospects.
“The Fed has made the promise not to go too quickly,” said Gennadiy Goldberg, a New York-based U.S. rates strategist with TD Securities, one of the 22 primary dealers that trade with the Fed. “Inflation is still low.”
Thirty-year yields fell three basis points this week, or 0.03 percentage point, to 3.02%, according to Bloomberg Bond Trader data. The price on the 3% security due in November 2045 rose about 5/8, or $ 6.25 per $ 1,000 face amount, to 99 19/32. The benchmark 10-year note yielded 2.26 percent, little changed on the week.
Traders are pricing in a 68% probability that the Fed will lift its benchmark from near zero in December, and are signaling that the fed funds rate will still be below 1% in a year. The calculations are based on the assumption the effective fed funds rate will average 0.375% after liftoff, compared with the current range of zero to 0.25%.
Sliding commodities prices are helping lower inflation expectations. Oil has slumped almost 50% in the past year, dipping below $ 40 a barrel this week for the first time since August. The Fed’s preferred price-growth gauge has been below its 2% goal since 2012.
Meantime, currencies and stocks across emerging markets staged their biggest rally in six weeks as the Federal Reserve signaled it will raise interest rates gradually, spurring optimism for a tempering in outflows from riskier assets.
A gauge tracking 20 exchange rates in developing countries increased 0.8% in the five-days through Friday, advancing from the verge of a record low. The MSCI Emerging Markets Index approached its 100-day moving average after climbing 2.7% during the week. Malaysia’s ringgit rallied 2.1%, the fourth-best performance among peers it’s mostly trailed this year.