Global Bonds May Extend Rally as Economies Cool, Goldman Says

By David Tweed

Nov. 21 (Bloomberg) -- Global bonds may extend their rally as economic growth slows and central banks cut interest rates and pump funds into the financial system, Goldman Sachs & Co. said.

The yield on the benchmark U.S. 10-year bond may decline to 2.75 percent by early next year, from 3.02 percent late yesterday in New York, Francesco Garzarelli, chief interest-rate strategist at Goldman, wrote in a note. Goldman's previous forecast was for 3.5 percent.

U.S. Treasury yields tumbled to record lows yesterday, with two-year notes dropping below 1 percent for the first time, as global stocks slumped and a deepening recession drove investors to the safest assets. U.S. jobless claims surged and manufacturing output dropped, reports showed yesterday.

``Economic indicators have taken a turn for the worse, and inflation is on the retreat,'' Garzarelli wrote in the note. ``Central banks in the major economies have responded by lowering policy rates and expanding the provision of liquidity.''

German 10-year bond yields could fall to 3.0 percent from 3.38 percent late yesterday and yields on similarly-dated U.K. securities may decline to 3.5 percent from 3.88 percent, Goldman Sachs said. The bank previously forecast 10-year bund yields at 3.5 percent and U.K. yields at 4.3 percent.

``These forecast changes are in response to downward revisions in our economists' policy rate projections, but also reflect our view that the bond premium has room to fall,'' Garzarelli wrote.

Futures on the Chicago Board of Trade show a 62 percent chance the central bank will reduce its target rate by 50 basis points at its Dec. 16 meeting. The rest of the bets are for a 75- basis-point reduction.

To contact the reporters on this story: David Tweed at dtweed@bloomberg.net.