Goldman Warns of a ‘Baby Bear’ Market in Bonds for 2020

Market predictions for next year are pouring in from Wall Street, but the most arresting is from Goldman Sachs, which predicts a “baby bear” market in bonds. If so, that would mark a disruption in long bull run in bonds, which began in the 1980s with the fall of interest rates from double-digit levels.

To call bonds’ potential trajectory in 2020 any kind of a bear market, baby or not, may be overstating things. While the investment firm is upbeat about the economy next year and the stock market, it noted in a report that the Federal Reserve may be done easing, which ordinarily would limit price gains.

Still, Goldman strategists went on, an improving economy stands to push interest rates higher, which of course spells lower bond prices. “So although we are cautiously optimistic on the global economy, we forecast only moderately higher 10-year Treasury yields next year,” they wrote.

Right now, the bond market—as reflected by the Bloomberg Barclays US Agg—is up 8.6% in 2019, not even close to the S&P 500’s muscular rise, 24%. Goldman contended that the yield on the benchmark 10-year Treasury likely will climb to 2.25% by the latter half of next year.

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Nevertheless, that level is nothing new for the 10-year of late. It last was at that point in May. The T-note’s peak this year was in January, when it was just below 2.8%. Perhaps that’s why the firm appends the term “baby” to the downbeat bond market is foresees.

As their report explained, “With the Fed on hold and inflation unlikely to take off, we would discourage positioning for a major bear market.” Investors would do better to short bonds in Europe, where credit conditions are shakier, the report advised.

In the US bond market, Goldman advocated easing off of high-yield bonds, as lower earnings and high corporate leverage disconcert the firm’s strategists.

Related Stories:

Tumbling 10-Year T-Note Yields Have Lower to Go, Moody’s Says

S&P 500 Dividend Yield Surmounts the 30-Year Treasury

Uh-Oh, High-Yield Bond Downgrades Expand

Tags: 10-Year Treasury, Bond Market, Federal Reserve, Goldman Sachs, Inflation

Sens. Chuck Grassley (R-Iowa) and Lamar Alexander (R-Tenn.) have released a plan that would prevent critically underfunded multiemployer pension plans from collapsing.

The Multiemployer Pension Recapitalization and Reform Plan creates new authority for the Pension Benefit Guaranty Corporation (PBGC). The PBGC would be allowed to take on liabilities from financially troubled multiemployer pension plans to help them pay their obligations to retirees and current workers. The draft legislation also makes fundamental changes to regulations to make sure participants’ retiree benefits are appropriately funded and managed.

“This crisis is severe and gets worse every day,” Grassley said in a statement, adding that approximately 125 multiemployer plans have said they’ll become insolvent over the next two decades. That would leave more than 1.3 million participants without full pension benefits. “We need to act quickly, but we can’t just pour money into failing and mismanaged funds,” the Iowa senator said. “Our plan will provide relief and reform now; without it our retirees will be left without the future they worked for.”

The plan cited structural, demographic, and economic challenges within the private-sector multiemployer pension system that have put many multiemployer pension plans in a “dangerously poor financial condition.” Although many plans have improved their funded status since 2010, those that were in the worst condition after the 2008-2009 economic downturn are still deeply underfunded and face insolvency.

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The Government Accountability Office (GAO) estimates that 25% of critical-status plans face certain insolvency, with no possible combination of contribution increases and benefit reductions able to help them to improve from critical status.

“One of the most important characteristics of these troubled plans is their unfunded legacy liabilities,” said the statement in its technical explanation. “These liabilities are attributable to employers that have exited the plans, either because of bankruptcy or business failure, and in most cases paid withdrawal liabilities insufficient to finance future benefits of remaining participants.”

According to the Congressional Budget Office (CBO), these large legacy-liability costs are a product of withdrawal-liability rules established under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA). Under current law, an employer withdrawing from a multiemployer plan must make withdrawal-liability payments equal to their share of unfunded vested benefits.

“However, various limitations in law and practice result in underpayments of this liability,” said the plan. “The legal obligation to cover these liabilities is a significant reason why the majority of critical and declining plans are unable to fund their pension liabilities in full.”

The plan would enhance PBGC authority to provide financial assistance through a partition. That would improve the ability of severely struggling multiemployer plans to regain their financial footing by funding their legacy costs prior to becoming insolvent. It said partitioning will allow the plans to fund benefit obligations more adequately with ongoing contributions.

The Multiemployer Pension Recapitalization and Reform Plan includes five major components:

Stabilizing plans in immediate danger of failure by partitioning authority, and funding relief.
Securing workers’ and retiree’s benefits, while increasing PBGC guaranteed benefit levels.
Strengthening the PBGC’s ability to backstop the multiemployer system by increasing funding through shared responsibility.
Reforming the funding and liability measurement rules for greater predictive value, and reforming withdrawal liability rules to encourage employers to stay and new ones to join.
Ensuring fiscal responsibility through funding reforms and stakeholder contributions, and front-end federal contribution offset through additional revenue.