Why do AI concerns keep Goldman Sachs bullish on the middle of the US Treasury curve?

  • A recent flight to safety has pushed bonds higher, and the gap between long-term US yields and Goldman Sachs’ fair value has narrowed. Support from low duration positioning and easing technical selling pressure remains. When AI concerns drive volatility in risk assets, the portfolio hedging role of bonds becomes clearer.
  • Goldman Sachs continues to favor the middle of the yield curve, which it believes typically outperforms during rate hikes and in the period immediately afterward. However, if AI concerns ease while energy prices keep rising, some of the recent bond market gains could be reversed.
  • Goldman Sachs expects the Federal Reserve to hold rates steady next week. Inflation pressures coexist with tighter financial conditions; which of the two the statement emphasizes will affect the persistence of rate-hike pricing at the short end.

As energy inflation recedes, why should the US and Europe use different instruments?

  • Goldman Sachs expects inflation pressure from the energy shock to ease in 2027, but the transmission before then differs: in the US it is showing up more in higher real rates, while in Europe and the UK it is reflected more in market inflation pricing.
  • US inflation pricing is broadly in line with the bank’s forecasts and model fair value, so Goldman Sachs favors long positions in real rates. Recent European forward inflation pricing is high, making positions that benefit directly from a decline in inflation pricing more suitable.
  • The distinction depends on why inflation falls: if weaker growth is the main driver, long positions in nominal bonds will typically outperform long positions in real rates.

Why favor eurozone flattening without rushing to bet on a recovery in French spreads?

  • Rising energy prices create pressure to raise rates, while sovereign bond volatility tightens financial conditions. Goldman Sachs believes that the more hawkish the European Central Bank becomes, the more likely it is to trigger pressure on sovereign spreads, which in turn limits expectations of rate hikes further ahead. It therefore favors a narrowing of the spread between 2-year and 5-year yields.
  • Although French government bonds have diverged substantially from the bank’s fundamental valuation, there are no catalysts for a rapid easing of social unrest, budget negotiations and energy pressures. Goldman Sachs raised its forecasts for French and Italian 10-year spreads over Germany at mid-2027 from 95 and 90 basis points to 130 and 105 basis points, respectively.
  • A recovery also requires credible fiscal deficit-reduction measures. However, the bank sees limited risk of domestic financial institutions triggering self-reinforcing selling, citing the relatively small size of pension funds, improved bank capital and manageable pressure on insurers.

Why does the UK budget opportunity lie in issuance maturities rather than the total amount?

  • Goldman Sachs expects the government’s net cash requirement to rise by 5 billion pounds, financed by short-term Treasury bills. The annual gilt sales plan remains at 246.2 billion pounds, with less issuance of long-dated conventional gilts and some inflation-linked bonds, and more issuance at short and intermediate maturities.
  • Shorter maturities reduce the interest-rate risk the market must absorb. Goldman Sachs favors 10-year gilts strengthening relative to swaps, provided the budget avoids a material fiscal deterioration. Stronger growth, the labor market and energy pressures continue to limit the appeal of an outright long position in UK bonds.

Japanese long bonds have support, so why are 5-year bonds still under pressure?

  • Japanese life insurers continued to buy long- and super-long-dated government bonds in September, supporting stability at the long end. However, the 10-year to 30-year curve is already slightly flat relative to Goldman Sachs’ fair value, while the 2-year to 5-year and 5-year to 10-year segments remain steep.
  • Goldman Sachs expects the Bank of Japan to hold rates at its next meeting, but the market is pricing in more tightening than the bank’s baseline. This pressure is more concentrated in the middle of the curve, so the bank remains underweight 5-year bonds. Support at the long end depends on demand holding up and fiscal concerns not intensifying further.

How do rate-hike expectations differ across Canada, Australia and New Zealand?

  • Goldman Sachs already expects Canada to raise rates in October and January of the following year, but trimmed-mean and median inflation below 2% and weak employment limit the scope for further hikes. The market also prices in two subsequent hikes, so the bank favors the middle of the Canadian curve.
  • For Australia, Goldman Sachs expects a final rate hike in November and gradual easing in the second half of 2027, and favors flattening at the short end of the curve. For New Zealand, it expects hikes in October and December. Although it believes too much cumulative tightening is priced in, a hawkish response and a lower starting rate make a decline in local yields more dependent on the transmission of expectations for easing abroad.