Have interest rates peaked?

- Investors are increasingly bullish on IPOs # # --------------------------------------------------------------- The key takeaways today: - How high can bond yields go? - Investors are increasingly bullish on IPOs - High-yield companies are coming to terms with higher rates - Investors are becoming bearish on stocks - How Goldman Sachs and McKinsey are preparing diverse candidates for board seats - Brainteaser: What is the pay gap between men and women? Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- The implications of higher-for-longer rates Treasury yields have risen sharply higher in recent months amid a resilient US economy and messaging from the Federal Reserve that rates are likely to stay higher for longer. But Goldman Sachs Research's Praveen Korapaty, chief interest rates strategist, sees signs that bonds may rally and expects yields to decline toward the end of this year and in 2024. He believes the current selloff has been overdone and that 10-year notes are “fairly valued” at closer to 4.3%. While Korapaty wouldn't rule out another decline in Treasuries, he doesn't expect the selloff to last: “I think that the selloff would not stick, meaning to the extent you see further selloff from here, you increase the risk of a sharper reversal in these yields,” he says on [Goldman Sachs Exchanges](. More broadly, an imbalance between the supply and demand of long-term bonds is likely to keep yields elevated, explains Anshul Sehgal, co-head of US Interest Rate Products Trading, in Global Banking & Markets. Institutional investors have little incentive to buy long-term bonds, which are yielding roughly the same as short-term notes. Meanwhile baby boomers — long-term buyers of long-term bonds — will curb their demand for bonds as they move into retirement, he says. That market is going from “a place where you had many different constituents that wanted to buy sovereign bonds, to a place where none of these constituents want to buy sovereign bonds at all,” Sehgal says. And while the bond selloff has pressured the performance of risk assets such as equities, company bonds should remain a good investment given that the debt burden decreases in real terms over the years in an inflationary environment, Sehgal adds. “Equities can continue to look like a really good value to me in a world where there is the chance that inflation re-emerges in a meaningful way,” he says. --------------------------------------------------------------- Investors show signs of a growing appetite for IPOs More than half of respondents to Goldman Sachs' [Bi-Annual Equity Capital Markets Survey reported a high risk appetite for IPOs]( for the last quarter of this year and the first quarter of 2024. The survey, which took place in September, included mutual funds, hedge funds, family offices, pensions, crossover funds, and sovereign wealth funds. While 46% of respondents think the recession outlook for this year and the first quarter of 2024 is still uncertain, a growing number of investors (41%) are planning for a soft landing. “We're starting to see a slow re-opening of the IPO markets,” says Lizzie Reed, global head of the equity syndicate desk in Goldman Sachs Global Banking & Markets. She notes the amount of IPOs that priced in the Americas in September surpassed the total IPO issuance for the first nine months of 2022. The flurry of public offerings adds to a series of “positive data points for the health of the IPO market,” Reed says in an episode of [Goldman Sachs Exchanges: The Markets]( That's important “particularly as we head into Q4, where we are seeing a bit of volatility once again creep into the macro environment, but also sets up a very active 2024 assuming the market stabilizes,” she says. --------------------------------------------------------------- High-yield companies are coming to terms with higher rates Companies in the US with lower credit ratings are starting to accept that interest rates may not drift lower anytime soon. That means a growing number of them are beginning to refinance debt and tap the bond market, rather than holding out and hoping the Federal Reserve will cut rates, says Christina Minnis, head of Global Credit Finance and head of Global Acquisition Finance in Goldman Sachs Global Banking & Markets. High-yield company bonds yield around 9%, more than double the rate two years ago. At the same time, a significant amount of debt matures in the coming years, particularly around 2028. Executives will start refinancing those bonds and leveraged loans well before the maturity wall closes in, Minnis says. She expects that [high-yield public companies can probably weather the rise in interest rates, and some will look to the convertible bond market](. Companies that were taken private in a leveraged buyout, however, have already been hit by rising interest rates because they have floating-rate loans. Those borrowers will likely look to add equity type capital, as well as to amend and extend the maturities of their term loans. --------------------------------------------------------------- October QuickPoll: Investors see an end to the bond selloff Investors are turning bearish on stocks and say the bond selloff is coming to an end, according to results from Marquee QuickPoll, which surveyed more than 1,000 institutional investors in early October. Key findings include: - Most investors expect interest rates to stabilize and equities to fall further, with 53% of investors expecting the S&P 500 to end below 4,200 by year-end. - Sticky inflation and the selloff in longer-term Treasuries continue to be the most important risks to equities, while 1 in 4 respondents still see a significant recession risk. - Most investors seem to think the worst is over for the bond selloff. Only 38% see yields on US 10-year Treasuries above 4.75% by year-end, and around 1 in 12 see it above 5%. --------------------------------------------------------------- Quoted at GS “We decided to help our clients get there by suggesting exceptionally talented diverse candidates.”  —Ilana Wolfe, head of corporate board engagement at Goldman Sachs, on [Spotlight, a joint program of McKinsey and Goldman Sachs]( that prepares candidates to serve on their first corporate board, particularly those from groups historically underrepresented on corporate boards. Spotlight is an offshoot of Goldman Sachs' [announcement]( in 2020 that it would not take a company public in the US or Western Europe unless it had at least one diverse board member, expanding the requirement in 2021 to two, including one woman. --------------------------------------------------------------- Briefings Brainteaser: Pay gap research wins Nobel Prize Claudia Goldin was awarded this year's Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The Harvard professor's [work is credited]( with providing the first comprehensive account of women's labor market participation and earnings based on more than 200 years of data from the US. Goldin's research shows that much of the remaining pay gap is between men and women who do the same jobs, and it tends to increase after a woman has a child.  Reducing the pay and employment gap between men and women would create a fairer society, and it would also boost GDP,[ according to Goldman Sachs Research](. For this week's Brainteaser, what is the pay gap between men and women in developed markets? A) 5% B) 9% C) 18% D) 23% [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( October 10 [Earnings will be the first time in a year we see positive EPS growth, says Goldman's David Kostin (4:08)]( [The Dallas Morning News]( October 10 [Goldman Sachs' new Dallas campus is underway with 4,000 workers destined to move there]( --------------------------------------------------------------- --------------------------------------------------------------- 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. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. 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