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Idea of the Day: Why Goldman Sachs could benefit from Treasury yield revival

What: Goldman Sachs has been the weakest performers’ out of the major US banks this year, however things could be about to change for this Investment bank.  Firstly, the recent rise in US Treasury yields, is very good news for investment banks’ fixed income units, particularly Goldman Sachs’, which suffered a heavy decline in profit for the second quarter of this year. US 10 – year Treasury yields have risen some 14 basis points since tanking on Friday, and the expectation is for further gains in the coming weeks. This is particularly relevant for Goldman Sachs, since the short-term correlation between the bank and 10-year US Treasury yields is a whopping 93%. Secondly, global banks along with insurers have seen expectations for 2017 lifted with upgrades to earnings outweighing cuts by the largest margin since 2009, which should also benefit the share price of the overall banking sector.

How: As you can see in chart one below, Goldman has moved in line with the Treasury yields for most of this year, in the last two months the correlation between Goldman’s stock price and Treasury yields has been nearly 80%, thus, where Treasury yields go, so to, it appears, does Goldman Sachs’ stock price. If we see a continued recovery in Treasury yields, Goldman may play catch up to its peers, as you can see in chart 2 below. Goldman Sachs has been the weakest performer vs. Citi, JP Morgan and Bank of America, which has been the top performer out of the major US banks.

Chart 1: 

Source: City Index and Bloomberg

Chart 2: 

Source: City Index and Bloomberg


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