"Goldman: 'Dramatic divergence' coming in market"

From CNBC via Yahoo Finance:

Stocks will significantly outperform bonds in the years ahead as investors get used to interest rates that will rise more than consensus expectations, according to an analysis from Goldman Sachs. 

Goldman foresees the Federal Reserve raising rates in the third quarter of 2015 and taking its funds rate all the way to 4 percent eventually, about double the level predicted by many in the market, including bond manager Pimco, which foresees a short-term "neutral" level of half that. 

"We forecast a dramatic divergence between stock and bond returns during the next several years," Goldman strategist David J. Kostin and others wrote in a note to clients.

The firm sees the S&P 500 (^GSPC) stock index returning 6.2 percent a year between now and 2018-well below its stellar performance of recent years-when the funds rate hits 4 percent. During that time, Goldman projects the benchmark 10-year Treasury note to return just 1 percent, compared with a 10.8 percent annualized return over the past five years....MORE

And from ZeroHedge:

What Bond Traders Are Saying: "It Won't Be Pretty"

With rates seemingly flip-flopped today (yields higher as stocks drop), we thought it worth skimming what the smart money in the bond market is thinking. As RBS Strategist Bill O'Donnell warns, "Janet must act like a diving instructor, hoping to bring levels to the surface without giving the economy the bends. What makes it really risky for Janet is that financial sector regulation has created a ‘one-way valve’ in secondary market liquidity. Nobody really knows how the system will hold up under duress." This is confirmed by Scotiabank's Guy Haselmann who fears, "the Fed will have difficulties controlling market gyrations and its potential loss of credibility from troubles that are likely to arise from its exit strategy."

RBS strategist Bill O’Donnell writes in client note.

“It won’t be pretty, regardless. My assumption is that investors will sell or hedge where they can first (ETFs or hedge in ever-liquid USD swap spreads) and that’s one of the many reasons why I fancy 5yr swap spread wideners as a medium-term trade”

“I won’t get long-term bearish on bonds unless/until there are clear signs that animal spirits have re-emerged in the US economy or that EU rates are lifting off the floor”

Other observations from morning notes by strategists and traders...

...MORE