Could 10-year Treasury yields hit 5%?

- General Catalyst's CEO on an AI-enabled transformation # # --------------------------------------------------------------- The key takeaways today: - A resilient US economy is driving up bond yields - Electrification may halve European households' energy bills - How Middle East tensions are rippling through markets - Commercial real estate pressures will take years to stabilize - General Catalyst CEO says AI could transform healthcare and law - Robert Rubin on the biggest risks to the US economy - Brainteaser: Which asset has had the highest returns? Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- A perky US economy could mean higher 10-year Treasury yields Have bond yields peaked? That may depend on when they mature. It certainly looks that way for yields on very short-term securities, according to Goldman Sachs' Josh Schiffrin, co-head of Global and US Interest Rate Products in Global Banking & Markets. Strong economic data and recent comments from Federal Reserve speakers suggest the Fed is done hiking rates, he says on an episode of [The Markets](. Fed speakers have noted that the rise in longer-term yields could potentially substitute for, or at least reduce the need for, rate hikes as a way to slow the economy, he says. “We are very likely at the peak federal funds rate." The rise in longer-term yields, meanwhile, reflects the market's adjustment to a resilient economy and could still run higher. “I think the stronger economy has surprised many market participants and yields have been rising as the market has digested a series of stronger-than-expected reports on hiring and on consumer spending,” he says. “It's too early to say definitively that we've seen the highs in long-term rates,” he adds. “There is definitely the possibility that we will see a 5-percent-handle on the 10 year.” --------------------------------------------------------------- Electrification may cut European household energy bills in half Green power is rising after three centuries of hydrocarbons driving the global economy. [The shift is being helped along by social acceptance of renewables, growing policy support, and increasingly attractive economics]( — most capital expenditures for electrification in Europe are now deflationary compared with hydrocarbon alternatives, according to Goldman Sachs Research. - “We model the full electrification of a typical European household and conclude that switching to electric heating and electric mobility would lower the overall energy bill by more than 50%,” Alberto Gandolfi, head of the European Utilities Research team in Goldman Sachs Research, writes in the team's report. Deflation from electrification could also aid Europe's re-industrialization. - While the “electrification cost curve” the authors developed for the report suggests strong tailwinds for green capital expenditures in Europe, the situation in the US appears different. Only about one third of the electrification process would be deflationary over 10 years, compared with more than 70% in Europe (using a benchmark of $80 per barrel oil). - A key difference for the US economy is, simply, lower energy bills. This supports the argument that the $400 billion in electrification incentives in 2022's Inflation Reduction Act may have been needed “to avoid a near-term impact on consumers,” Gandolfi writes. --------------------------------------------------------------- How the Middle East conflict is rippling through financial markets Most importantly, our thoughts are with those affected by the attacks in Israel and the escalating conflict in the Middle East. The tensions are rippling through markets in several keys ways, according to Goldman Sachs Research. While global oil production remains unaffected by these developments, there's a moderate risk that Iranian crude production in 2024 will be lower than our analysts' forecast. A scenario in which Iranian output is 0.4 million barrels/day lower than their baseline would raise their Brent oil price forecast for the second half of 2024 by $5 to $105/barrel. Likewise, the conflict hasn't yet meaningfully disrupted liquified natural gas supplies, but there are risks to European natural gas prices given the ongoing disruptions to Israeli gas production. And while the shekel initially depreciated sharply in the wake of the attacks on Israel, the pace of the currency's depreciation has slowed following the Bank of Israel's announcement that it stands ready to provide foreign-exchange liquidity. Large foreign-exchange reserves and external buffers, along with scope for financial repatriations, suggest the shekel is unlikely to weaken substantially from here, according to our research analysts. --------------------------------------------------------------- Commercial real estate stress rises amid higher rates and a pullback in bank lending The CRE sector is in for a lengthy process of revaluation, deleveraging, and recapitalization, as $2.6 trillion of CRE loans mature over the next five years in a higher interest-rate regime, RXR's Chairman and CEO Scott Rechler says on the latest episode of [Goldman Sachs Exchanges,]( which is based on Goldman Sachs Research's latest [Top of Mind report](. Rechler says that process is still in the early innings, and “a lot of the recognition as to where the valuation marks are and on the loans that are maturing [hasn't] yet happened.” Meanwhile, Stijn Van Nieuwerburgh, professor at Columbia Business School, warns the office market crisis is a “trainwreck in slow motion” given that the core problem is an oversupply of office space. Repurposing those spaces will take time, he says, even when such reallocations are physically and financially feasible — and they often aren't. Rechler and Nieuwerburgh see widespread pain for both CRE debt and equity holders. They also anticipate another round of the regional banking crisis that could bring hundreds of bank closures and consolidation in the industry, as banks grapple with significant declines in CRE loan values on top of other challenges. “I wouldn't be surprised if a couple hundred small banks toppled over,” Nieuwerburgh says. “I think the closest parallel to this is what happened in the '80s with the savings and loans crisis.” --------------------------------------------------------------- General Catalyst CEO Hemant Taneja on AI's transformation advantage Hemant Taneja of General Catalyst and Michael Brandmeyer of Goldman Sachs Society is in a 30-year digital transformation, according to Hemant Taneja, CEO of General Catalyst, that started with mobile computing in the mid-2000s and is now moving toward an AI-enabled transformation of the economy. “In the next 15 years, [through] the use of AI, most of the value is going to get captured in this transformation role and in this partnership between the technology industry and other industries to bring about this change,” Taneja says on an episode of [Goldman Sachs Exchanges: Great Investors](. Taneja is particularly optimistic about AI's role in transforming sectors such as healthcare, finance, media, and law. “We must have seen close to 1,000 companies in the first half of this year now, and people are attacking the use of language models in every different direction, every different one of these kinds of use cases,” Taneja says, referring to the investment opportunities being pitched to the multi-stage venture capital firm. “It's going to be a tremendous era of building innovative companies over the next 15 years because of this shift.” --------------------------------------------------------------- Robert Rubin: The biggest risks to the US economy are political, not financial Robert Rubin has led both the US Treasury and Goldman Sachs, which gives him a rare perspective on interactions between the financial and political systems. His recent book The Yellow Pad lays out his approach to thinking and decision-making, drawing on those and other experiences from his life and career. While many investors worried about the health of the financial system after three banks failed earlier this year, Rubin says he still believes the US economy has enormous strengths over the long term. David Solomon of Goldman Sachs and Robert Rubin “The biggest risks today are not really in the financial system — they're in the political system,” Rubin told Goldman CEO David Solomon in a [Goldman Sachs Talks](. “The problem is that we face enormous policy challenges. And while Biden accomplished a lot, the predominance of our challenges haven't been met.” One of those policy challenges is China. Rubin believes the US should change its approach toward the world's second-biggest economy to focus on common interests such as nuclear weapons, potential risks of artificial intelligence (AI), and the threat of global pandemics. Climate change poses another massive problem. Rubin calls it an existential risk that is beyond the scope of any one government to address. He believes companies may choose to engage, but they can't bear the responsibility of protecting the climate. And while Rubin believes banking is in relatively good shape even after this year's woes, Washington still needs to make changes to prevent future bank failures. That includes the $250,000 federal deposit guarantee; Rubin thinks it needs to be updated, and that, too, requires policymaking from Congress. “The problem is all of these require a moderately effective political system,” Rubin says. --------------------------------------------------------------- Briefings Brainteaser: High-returning assets Rising yields are luring American households to buy money market mutual funds and bonds instead of stocks, Goldman Sachs Research Chief US Equity Strategist David Kostin writes in the team's report. Kostin expects corporations, meanwhile, to remain the largest source of equity demand in 2024, alongside a rebound in buybacks and cash M&A. And while foreign investors have backed away from the Treasury market in recent quarters, they have been net buyers of US stocks this year. For this week's Brainteaser, which of these assets has had the highest total return in 2023? A) 10-year Treasuries B) High yield bonds C) Crude oil D) Gold [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( October 18 You will see a broader set of companies looking to go public next year, says Goldman's Kim Posnett (3:58) [CNBC]( October 13 [China's economy ‘could be bottoming out,' but unlikely to have robust reflation: Goldman Sachs (2:17)]( --------------------------------------------------------------- --------------------------------------------------------------- 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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