Credit in a 'sweet spot' for returns in 2010, says Goldman

In their latest Credit Markets Daily commentary, Goldman Sachs strategists claim that credit is still in a ‘sweet spot’ and will continue to offer substantial returns in 2010. They also say that mutual fund demand is likely to remain strong. Despite two weeks of record outflows from credit funds – nearly $2 billion – these turned back into inflows of some $470 million last week.

Recent macro data is a reminder that the US economy still faces headwinds from a weak labour market backdrop, declining house prices and flimsy consumer confidence. At the same time, policy rates are likely to remain low. The combination of uncertain macro fundamentals and low rates will keep investor demand flowing into fixed income products, says Goldman.

Within fixed income, credit looks particularly well-positioned to benefit from this search for yield versus other assets, thanks to its attractive valuations and improving fundamentals. In addition, corporate de-leveraging is likely to be associated with decreasing supply of bonds and loans. By contrast, borrowing requirements for governments will be high this year, and the market may remain nervous about the potential impact of the termination of the Fed’s mortgage asset purchases by the end of March.