Goldman Sachs braces for the coming great rotation


The idea that a Great Rotation is at hand has gained currency lately.

The idea is that the historic bull run in bonds is destined to end, with stocks as the great beneficiary. The possibility of rising interest rates as the economy recovers cannot be discounted, and it would behoove all to ponder the impact of this rotation.

The idea has apparently been discussed at Goldman Sachs. In the past year, Goldman Sachs "has dramatically cut the amount of money it could lose on any given day if interest rates were to rise, which would cause bond prices to fall. The bank has also upped its own borrowing in order to lock in low interest rates. The moves mirror cautious statements recently made about the bond market by Goldman's two top executives. Last week, at the World Economic Forum in Davos, COO Gary Cohn, who is the firm's No. 2 executive, warned that many banks and investors might not be prepared for the possibility of a 'significant repricing' in the bond market," according to CNN

The bank indeed seems to be hedging itself against a big surge in rates. Its VAR linked to interest rates has plunged to $67 million from $123 million in the fourth quarter a year ago. It will be interesting to see if the bank benefits from a great bond crash the way it did from the housing collapse.

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