How the market will digest $1 trillion of Treasury issuance

- Also: Bill Gates on the AI revolution. # # --------------------------------------------------------------- The key takeaways today: - Why repeated brinkmanship over the debt limit could hurt U.S. assets - Youth unemployment in China is rising - Real estate, under pressure, still offers a hedge Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- Daunting debt limit dynamics While the U.S. Senate passed a deal late Thursday to raise the debt ceiling, this year's impasse will join a growing list of contentious debt limit episodes in recent decades, say government policy experts in Goldman Sachs Research's most recent [Top of Mind report](. “From a broad, long-term perspective, this outstanding political polarization casts a cloud on the United States' ability to repay its debt — not its economic capacity to do that, its institutional economic ability — but rather the political willingness,” Stephen Kaplan, associate professor at George Washington University, tells host Allison Nathan, on [Goldman Sachs Exchanges](. “That can't be good for any U.S. asset,” he says, arguing that repeated brinkmanship over raising the debt limit creates the tail risk — however small it may be — of a U.S. default that could eventually erode the willingness of countries and investors to hold U.S. dollars. For his part, Alec Phillips, Goldman Sachs Research's chief political economist, doesn't believe the dollar is particularly harmed by the brinkmanship in the absence of reserve currency alternatives, and explains why abolishing the debt limit would be easier said than done. Meanwhile, David Beers, the long-time head of sovereign credit ratings at S&P when the rating agency downgraded the U.S.'s credit rating in 2011, says the high level of indebtedness is the real problem that could ultimately hurt U.S. creditworthiness. And abolishing the debt limit would do little to solve these fiscal concerns. --------------------------------------------------------------- The Markets: What's next for US Treasury issuance? 🎙️ As the debt limit deal goes to President Joe Biden's desk, the Treasury is poised to have to issue around $1 trillion of debt in the coming months. In this week's [Markets podcast]( from Goldman Sachs Exchanges, Beth Hammack, co-head of the Global Financing Group in Global Banking & Markets, explains the implications of the new issuance, the Fed's next move and the underlying trends shaping the equity markets. As the Treasury looks to [rebuild its cash balance]( "they are going to have to be issuing in the markets at a pretty rapid clip," Hammack says. The buyers for the T-bills are expected to come from money market funds that have deposited their cash at the Federal Reserve using reverse repo purchase (RRP) agreements, she says. "Is this money coming out of RRP as we expect, or is it coming out of bank reserves, which could present a bit of a different picture from a stability perspective for the overall market." (And in case you missed it: [As debt limit talks intensify, the US may have to quickly raise $1 trillion]( from our Short-Term Interest Rates Trading desk.) Start your Friday mornings with our new podcast, [The Markets, from Goldman Sachs Exchanges.]( In just 10 minutes or less, we break down the key issues moving markets. Find us wherever you listen to podcasts. --------------------------------------------------------------- Bill Gates on the AI revolution in education and new era of the “personal agent” L to R: Patrick Collison of Stripe and Bill Gates Bill Gates doesn't think any single company will dominate AI, but he does see at least one big opportunity that's ripe for the taking. “There will be one company that creates a personal agent that will understand all your activities and will read messages. It will read the stuff you don't have time to read,” he says in conversation with Stripe co-founder and CEO Patrick Collison at Goldman Sachs and SV Angel's [AI Forward conference in San Francisco.]( “That's a big thing because you'll never go to a search site again. You'll never go to a productivity tool again. You'll never go to Amazon again. Everything will be mediated through your agent,” the Microsoft co-founder says. “Whoever wins that, it'll take the current dispersed, high profit areas, and move them into a single area.” As for whether that agent will come from a large, established tech company or a startup, Gates isn't sure. “I'd say that's 50/50,” he says. “I mean, I'd be disappointed if Microsoft didn't come in there. But I'm very impressed with a couple startups.” In the meantime — AI stocks are soaring. For more Goldman Sachs insights on artificial intelligence, [click here.]( --------------------------------------------------------------- Why has China's youth unemployment risen so much? Youth unemployment in China has stayed stubbornly high, even as the overall urban unemployment rate continues to improve with the reopening of its economy: Joblessness among 16- to 24-year-olds in April increased to 20.4%, roughly double the age group's pre-pandemic level in April 2019, [Goldman Sachs economist Maggie Wei writes in the team's report.]( Cyclical factors are only part of the story. Young people tend to be particularly vulnerable during economic downturns, most likely due to a lack of work experience. This tendency has been amplified by the pandemic, which was particularly tough on services industries that tend to hire more young workers. Skillset mismatches help explain higher than normal joblessness. Our economists find that mismatches between the skills graduates acquired from higher education and those required by employers are likely contributing to the abnormally high rate of joblessness. It may take some time to bring youth unemployment back down. Goldman Sachs Research estimates that the country's services recovery could lower youth unemployment by 3 percentage points in the current quarter, but the strong supply of young workers caused by graduation season could cause the rate to rise by 3 to 4 percentage points this summer, before starting to decline in the third quarter. Closing the structural mismatch in skillsets will likely be a longer-term task. --------------------------------------------------------------- Tough times for US office buildings, but real estate may still offer a hedge Commercial real estate — and office buildings in particular — are going through a challenging transition: Higher interest rates are rippling through the sector at the same time occupants are seeking out newer, more sustainable architecture in new parts of the country. “There is broadly an obsolescence issue in real estate right now, where you have just a ton of legacy, old stock, and that's most pronounced in office,” says Miriam Wheeler, head of Goldman Sachs' Global Real Estate Financing Group in Investment Banking. Banks and investors are skittish, and she points out that getting a new loan — even on a good office asset — can be challenging. In the near-term, the sector is expecting a certain amount of whiplash as banks and investors recalibrate for an era of higher interest rates, says Neil Wolitzer, a managing director in Real Estate Investment Banking at GS. Less lending to the sector will result in less supply, and the industry will find ways to deal with the less desirable properties. But even so, [North American real estate]( could experience strong global capital inflows in the medium term as a perceived geopolitical hedge in a more volatile world, he says. --------------------------------------------------------------- The Big Number: The gender credit gap is slowing growth $1,500,000,000,000 That's the estimated credit gap facing women-owned business around the world. [More than 100 countries]( still have legal barriers to women's entrepreneurship, including laws forbidding women from signing contracts, registering their business or opening bank accounts, while gender-based credit scoring and investors' cultural biases compound the issue further. Even then, many banks in developing markets demand fixed assets — like land titles or property deeds — as collateral for loans. This creates a further hurdle for women whose assets are often held under their male relatives' names. In fact, [women own only about 1% of registered land titles](. The case for encouraging, empowering and enabling women entrepreneurs is straightforward: Around the world, female entrepreneurs drive both economic growth and help to reduce poverty. According to the World Bank, there are now about 8 to 10 million formal small and medium enterprises (SMEs) with at least one female owner in developing countries. Finance can do more to bridge the gap and provide banking services that promote female entrepreneurs and respond to distinct local market dynamics. [Learn more.]( --------------------------------------------------------------- Quoted at GS “I applied to every single company in England that had a computer department that started with the letter A, and they all said no, and then I moved onto the Bs.”  — Tom Ilube, chair of the Rugby Football Union and founder of the African Gifted Foundation, joined [Talks at GS]( to discuss his journey as an entrepreneur and educational philanthropist. He recounts the obstacles he's faced — including institutional racism — and how he's learned to overcome the odds and persevere. --------------------------------------------------------------- Briefings Brainteaser: Which subsector is booming? Many European stock indexes have rallied this year. Which of these subsectors has had the highest returns in 2023? A) Airlines B) Luxury goods C) Defense D) Mining [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( May 31 [We expect a ‘modest' appreciation of the Chinese yuan after 3 months, Goldman Sachs says (2:13)]( [Bloomberg]( May 30 [Goldman has been ‘very bullish' on South Korean stocks (2:52)]( [Bloomberg]( May 23 [Goldman's Minnis: Take-Privates, M&A Activity Increasing (8:13)]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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