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In the latest client note, analysts at Goldman Sachs express their concerns on the impact of rising trend in the US real rates on risk appetite.

Key Quotes:

“As the rate of return on safe assets rises, the appeal of risky assets falls.

We increasingly worry that rising trend in US real rates vs global rates is “boiling the frog” on risk appetite.

An increase in the fragility of risk appetite is already visible in EM, we would argue, but it logically extends to global risk assets more generally.

The risks between now and December.

We see some risk that one of the “usual suspects” will re-emerge – Italian debt, China growth, US trade wars, liquidity events like the VIX spike. But Occam’s razor suggests the most likely risk is the thematic risk that is already playing out -rising US real rates on the world’s “safe asset” are leaving risky assets more vulnerable to otherwise-manageable imperfections in the risk environment.

An incremental risk is that Fed communication could turn more hawkish; whereas money markets are currently pricing roughly three more hikes through 2019,  our US economics team expects six. The strength of recent US data suggests the near-term risks to US real rates may be higher than markets expect.”

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