“We Like Bonds”

Labor Market Data Analysis

• November Employment Figures: The Establishment Survey reported a 64,000 increase in employment following a 105,000 decline in October; Goldman Sachs attributes the October drop to deferred resignations caused by the government shutdown rather than a structural economic deterioration.
• Unemployment Rate Revision: The headline unemployment rate appeared to rise to 4.6%, but the actual reported figure was 4.56%, representing a mere 12 basis point increase from September's 4.4% rather than the 20 basis point jump suggested by rounding.
• Forward-Looking Employment Outlook: Despite the "fogginess" in data due to the shutdown, Goldman Sachs maintains the labor market is not "falling off a cliff" and remains soft rather than collapsing.

Federal Reserve Policy and Outlook

• January Rate Cut Probability: The firm deems a rate cut in January highly unlikely, citing the lack of sufficient negative data to justify a move immediately after the recent "insurance cuts" in December.
• 2025 Rate Projection: Goldman Sachs anticipates two rate cuts will occur throughout the entirety of next year.
• Global Central Bank Signals: While the US Federal Reserve concludes its cutting cycle, other central banks like the Bank of Japan (BOJ) may hike rates, while the BOE and ECB will provide further direction; some global central banks are already pricing in potential future hikes, signaling a possible shift in the global cycle.

Fixed Income Market Strategy

• Yield Curve Steepening: The 10-year Treasury yield has remained static at approximately 4.6% since late April while front-end yields have fallen, resulting in a steeper curve as central banks have only controlled the near term.
• Optimal Bond Duration: The firm favors intermediate duration (specifically 2 to 5-year maturities) to balance yield pickup with manageable duration risk, rather than the longer end of the curve (10-year or 30-year) which faces higher term premium pressures globally.
• Corporate Credit vs. Treasuries: While credit spreads are at tightest percentiles in a 10-year lookback, Goldman Sachs prefers holding duration and base yields over chasing credit spreads, recommending a strategy of staying invested across both asset classes.
• Base Case Yield Metric: The 5-year corporate bond yield is cited at approximately 4.33% (yield to worst), serving as a baseline proxy for expected returns if market conditions remain unchanged.

Macroeconomic Scenarios and Catalysts

• Optimistic Scenario: If AI-driven productivity delivers a "quantum leap," the economy could grow while remaining disinflationary, allowing the Fed to keep rates steady while credit spreads tighten.
• Pessimistic Scenario: If the labor market deteriorates significantly, a dovish Fed (specifically under a "Kevin" chair persona implied to be more aggressive on cuts) would benefit long-duration bond holders.
• Key Economic Indicators to Watch: Immediate upcoming catalysts include US CPI data and various central bank communications regarding the end of cutting cycles.