FXStreet (Delhi) - Research Team at Goldman Sachs, suggests that as we have entered the first tightening cycle since 2004, following seven years of near-zero rates, there are idiosyncratic risks surrounding the outlook for 2016. Key Quotes “At the micro level, the instruments through which the Fed intends to tighten policy (IOER, reverse repos, term deposit, run-down of the bond portfolio) and their interaction with regulatory constraints on financial intermediaries, are largely untested. At the macro level, the market-implied expectation of ‘terminal rates’ is unusually depressed (the forwards discount that US policy rates will be barely positive in 5 years’ time), and the term premium is close to zero.” “Against this backdrop, the risk of negative shocks originating from the fixed income markets (ranging from liquidity dislocations to a rapid shift in duration risk) is hard to calibrate. We have confidence that the loopback effects for Fed policy (i.e., a shallower path for Fed Funds should financial conditions tighten excessively), against a global backdrop of low interest rates, would ultimately cap the increase in bond yields. But the path to the new equilibrium could be volatile.” “In terms of our recommended Top Trades, risk factor analysis suggests that our long US banks vs SPX, as well as long USD trade recommendations would stand to benefit from a rising USD yield environment, but historical comparisons may be less relevant given the exceptional starting conditions.” For more information, read our latest forex news.