Goldman Urges Bet Against Euro Junk Debt

Goldman Sachs Group Inc., after this
year’s losing endorsement of U.S. bank stocks, recommends as its
top trade for 2012 a bet against European high-yield corporate
debt and forecasts a “deeper recession” for the region.

The fifth-biggest U.S. bank in terms of assets recommended
in a research note that investors speculate on the rising cost
of insuring against the default of European junk bonds by using
the Markit iTraxx Crossover Index of 50 companies with mostly
high-yield credit ratings. The gauge of derivatives will climb
to 950 basis points, or 9.5 percentage points, from 770 basis
points, according to Goldman Sachs, which urges investors to
exit the trade if the index falls to 680 basis points.

“The ongoing shocks from the region’s sovereign crisis --
and policy responses to them -- are likely to be the biggest
determinant of the outlook over the next few months,” Dominic Wilson and Jan Hatzius, economists at Goldman Sachs, wrote in
the research note, published today.

Goldman Sachs said a year ago that the U.S. economy would
expand 2.7 percent in 2011, and U.S. bank stocks, junk bonds,
commodities, Japanese equities and China’s currency were its top
recommendations. America’s gross domestic product is forecast to
grow 1.8 percent in 2011, according to the median forecast of 63
economists in a Bloomberg News survey.

Drop in Financials


The Standard & Poor’s 500 Financials Index has lost 18
percent this year in the worst performance among 10 industry
groups. U.S. banks, measured by the 24-company KBW Bank Index,
have fallen 26 percent on a total return basis.

America’s high-yield corporate debt has returned 1.4
percent as of yesterday, according to Bank of America Merrill
Lynch index data. The Standard & Poor’s GSCI Total Return Index
of commodities has gained 1 percent. Japan’s Nikkei 225 Stock
Average has dropped 16 percent, while China’s yuan has
appreciated 3.6 percent against the dollar this year, according
to the China Foreign Exchange Trade System.

The U.S. economy will expand 1.5 percent next year, while
Europe’s will contract 0.8 percent, according to Goldman Sachs.
The bank lowered its worldwide economic growth estimate to 3.2
percent from 3.4 percent.

The financial crisis in the euro zone will weigh on the
U.S. economy through early 2012, according to Hatzius.

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