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Thursday, July 18, 2013

Goldman PMs Talk Fixed Income Over Breakfast

Reported by Nicole Spector

Thoughts and forecasting on fixed income markets were what was for breakfast this morning at the Goldman Sachs [profile] media briefing this morning at the Four Seasons Hotel in NYC. Bagels, fruit, juice, and coffee were served on the side.

Jonathan Beinner, co-head of global fixed income and liquidity management, and co-PM of the Goldman Sachs Strategic Income Fund (GSZAX) spoke, along with Andrew Wilson, co-head of global fixed income and liquidity management, and CEO of GSAM International for EMEA.

Representatives from Reuters, Dow Jones, CNBC, and other wires gathered around the conference table to listen and report. "You guys ask questions for a living!" Beinner quipped, adding, "I guess everyone has realized now that bonds are very exciting!"

But the mood quickly turned serious when Beinner and Wilson got down to business to discuss the state of fixed income at present, and the future as Goldman execs see it.

Beinner and Wilson think that the investment world is at "the beginning of the end of the global liquidity super cycle." Though central bank liquidity provision has been a dominant theme for several years, lowering volatility and risk premiums, Goldman's head honchos think that this trend has likely peaked, now that the Fed is moving toward tapering its asset purchases.

Beinner summed it up nicely when he said, "the benign environment for fixed income investment is coming to an end, and [thus] investors should think differently than they have in the past."

Fixed income markets are adjusting, Beinner and Wilson assured, both in terms of total returns and investor flows.

International activity is top of mind for Beinner and Wilson, who spoke of the grave conditions in Europe at length.

"If you lived in Europe, you'd be jealous of what was happening in the U.S," Wilson said. "It's getting scary how high unemployment is there. In Spain it's north of 25 percent."

It's safe to say, Wilson suggested, "there will not be growth in Europe this year."

The U.S will see an upswing, Goldman execs believe, of about three percent.

"Historically, [a three percent growth rate] is not something we'd get excited about," Wilson said, adding that it's a number that should make investors quite optimistic, when considering that just six years ago the U.S was entering a nadir of economic despair. "And guess what?" Wilson challenged, "The lights didn't turn off, the world didn't stop," he said. "Fiscal tightening is working and bringing down the deficit, which gives us confidence about 2014 in particular."

The optimism at Goldman is partly owed to the recovery of the housing market, which Wilson and Beinner maintain is what trigged the epic recession the U.S is still pulling itself out of. Housing affordability should remain attractive, even with higher mortgage rates and rising home prices. This recovery is durable, Beinner and Wilson asserted, and will support US growth for several years.  

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