Forex Flash: Current US yields are unusual, but justified – Goldman Sachs

As the market looks to the prospect of a more ‘normal’ recovery, the question of when and how quickly US government yields might rise is now sharply in focus. Current bond yield levels are unusual, but not unjustified. The extreme economic circumstances of the past few years and unprecedented central bank responses explain why yields have been where they have been.

According to the Economics Research Team at Goldman Sachs, “Mapping our policy views into yields helps illustrate likely ranges. We forecast a steady, but gradual, rise in yields over the next few years, based on our macro models of bond valuation. Here we use a complementary approach, decomposing bonds into the expected average policy path and the ‘term premium’, and mapping our economic outlook into both pieces.” Because there is uncertainty about this mapping, this defines a range of plausible outcomes consistent with our forecast.