Conflict and energy prices still dominate global rates tail risk

Overview

This report focuses on how the conflict path, energy prices, and policy responses affect global rates markets. Goldman believes rates remain in a difficult balance created by supply shocks, with possible exits including de-escalation and lower energy prices, or a marked weakening in growth and labor markets. However, March labor market data have temporarily delayed the scenario in which growth risk dominates, and the earlier easing in financial conditions has reopened tail risks of higher yields, hawkish policy, or conflict escalation.

Core views

The core views are: first, Goldman economists still think market pricing is relatively hawkish, with rates forecasts below forwards, but the recent rise in U.S. nominal yields has made the value less clear than before; second, U.S. real-rate longs are still seen as the better way to express uncertainty because U.S. inflation risk is limited, and real rates could lead the move lower if the conflict de-escalates; third, the U.S. Treasury demand backdrop is mixed, but funding conditions are stable, and swap spreads are more likely to trade with risk sentiment and volatility direction; fourth, European rates have partly adjusted to the possibility of policy tightening, but a definitive front-end easing still looks difficult; fifth, BTP performance versus OATs and Bonos has already adjusted materially, and it has room to outperform under multiple scenarios; sixth, the direction of Gilts still mainly depends on the BoE policy path, and Goldman expects the 10-year Gilt yield to be 4.40% by end-2026.

Analysis framework

The report evaluates global rates trades by combining macro scenario analysis, policy-path pricing, the rates volatility surface, Treasury demand structure, funding-market liquidity, sovereign spread relative value, and term premium decomposition. The analysis covers U.S. nominal and real rates, dollar funding markets, euro-area front-end rates, Italian BTP spreads versus other EGBs, UK Gilts, and rates options structures.

Methodology notes

• Macro scenario analysisConflict and energy price scenario framework

  Use conflict escalation, de-escalation, and energy-price paths to explain tail risk in rates markets.

  The report identifies two main branches for the market: de-escalation that brings lower energy prices, or weakening growth and labor markets that overwhelm inflation pressure.

• Rates strategyReal-rate versus nominal-rate decomposition

  Separate the drivers of nominal yields, real rates, and inflation risk premia.

  The report argues that much of the relative value in U.S. nominal rates has already been priced in, but because U.S. inflation risk is relatively limited, beta-adjusted long real rates still offer a better way to navigate uncertainty.

• Market structureTreasury demand and funding stress monitoring

  Judge demand and funding stress through Fed custody holdings, money market fund AUM, DVP repo, TGA, SOFR, and TGCR.

  The report notes that foreign official demand, private investors, leveraged demand, and banks together determine the Treasury demand backdrop; tax-date TGA changes may temporarily push up funding rates.

• Derivatives strategyRates volatility surface analysis

  Observe how implied volatility migrates from short-end, short-expiry structures toward longer expiries and longer tenors.

  The report believes short-dated rates volatility has come down, and the uncertainty premium may continue to migrate to farther expiries and longer tenors, which can be expressed by selling short-expiry strangles and buying longer-expiry straddles.

• Relative valueEGB sovereign spread relative value

  Compare BTP, OAT, and Bonos performance under rates volatility and energy shocks.

  The report believes BTP has already undergone a large volatility adjustment and, if the conflict de-escalates or volatility stabilizes, BTP should outperform other EGBs; if escalation resumes and fiscal reaction becomes the focus, France may come under relatively more pressure.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. real rates / TIPS

  Moderately bullish

  Strengths

  U.S. inflation risk is considered relatively limited, and real rates may lead the move lower in a conflict de-escalation scenario, making them suitable for navigating uncertainty.

  Weaknesses

  If the energy shock persists and inflation risk rises again, upside in long real rates may be constrained.

  Comparison

  Compared with long U.S. nominal rates, the report sees a clearer risk/reward profile for long real rates.

  Risks

  Conflict escalation, hawkish policy repricing, and rising inflation risk.

• U.S. nominal Treasuries / UST

  Cautiously bullish but with diminished value

  Strengths

  Goldman’s forecasts are below forwards, and the economists view the risk backdrop as more dovish than market pricing.

  Weaknesses

  Recent rate moves have eroded the previously accumulated value in nominal rates, and the demand backdrop is also mixed.

  Comparison

  More exposed than long real rates to inflation risk and energy-price shocks.

  Risks

  Lower foreign official demand, a stronger dollar, weaker leveraged demand, and tax-date funding pressure.

• U.S. funding markets / repo / SOFR / TGCR

  Short-term upward pressure is the focus

  Strengths

  Recent market volatility and the period after quarter-end did not show significant funding stress, and SRP adjustments plus a more stable reserve backdrop provide a buffer.

  Weaknesses

  The April 15 tax date and the associated TGA increase may create upward pressure on funding rates.

  Comparison

  Last September, a roughly $300bn rise in TGA caused a more visible but temporary jump in funding costs, while this year's baseline is milder.

  Risks

  A larger-than-expected TGA increase, changes in reserve-demand curves, and a renewed surge in market volatility.

• Euro-area front-end rates / EUR OIS

  Skewed toward a front-end flattener

  Strengths

  If the conflict escalates again, the market may focus more on growth risk and policy eventually returning to neutral, making the front-end flattener better on a risk/reward basis.

  Weaknesses

  If a credible de-escalation path emerges, the value of an April ECB hike option declines and front-end pricing could ease quickly.

  Comparison

  Compared with outright long front-end exposure, a curve expression better balances tightening and growth risks.

  Risks

  A renewed rise in oil prices, a hawkish shift in ECB communication, and persistent real inflation pressure.

• Italian BTP relative to EGBs / BTP-OAT

  Favors relative outperformance

  Strengths

  BTP has already experienced a large volatility adjustment, and if rate volatility stabilizes or the conflict de-escalates, it has room for spread compression.

  Weaknesses

  Italy is more sensitive to sustained increases in energy costs, and the fundamentals are fragile.

  Comparison

  The report believes BTP’s risk/reward versus OATs and Bonos has improved, and it expects the 10-year BTP-OAT spread to tighten by about 10bp.

  Risks

  Conflict escalation, persistently high energy costs, and pressure on Italian growth.

• UK Gilts

  May outperform in de-escalation and low-oil scenarios

  Strengths

  Goldman believes the BoE may be more dovish than the market is pricing, and the repricing in UK yields is driven mainly by policy-rate expectations rather than risk premia.

  Weaknesses

  Near-term pricing is still affected by oil prices and policy communication, and fiscal concerns could re-emerge.

  Comparison

  In a credible de-escalation and falling-oil scenario, Gilts are seen as a potential G10 outperformer.

  Risks

  Higher oil prices, repricing of the BoE policy path, and renewed fiscal concerns.

• Rates options volatility

  Leaning toward selling short-dated short-expiry and buying longer-expiry

  Strengths

  Short-dated volatility has given back about half of the war-related peak increase, and the uncertainty premium may migrate to farther expiries and longer tenors.

  Weaknesses

  If a short-term conflict or policy shock suddenly escalates, a short-expiry selling strategy could incur losses.

  Comparison

  The report gives the example of selling 3m2y strangles against buying 6m2y straddles with gamma-neutrality.

  Risks

  A renewed spike in realized short-term volatility and one-sided breaks in yield tails.

Key data

• Report date2026-04-03The cover shows Economics Research 3 April 2026.
• Change in Fed custody holdings of U.S. TreasuriesDown by as much as $82bnThe report says that since the start of the conflict, Treasuries held in custody at the Fed fell by about $82bn at the most, before rebounding somewhat in early April.
• Historical average TGA change around tax dateAbout $275bnOver the past four years, TGA rose by about $275bn on average in the week around April 15, with roughly two-thirds of the increase occurring on the tax day itself.
• Estimated funding-rate impact around tax dateAbout 5-6bpGoldman estimates that the average TGA change could lift the weekly averages of SOFR and TGCR by about 5-6bp.
• Fed reserve-management Treasury bill purchase baselineFrom $40bn per month of T-bills to $20bn per month of T-billsThe report expects reserve-management purchases to fall from $40bn to $20bn of T-bills per month after the end of April.
• April ECB meeting pricingAbout 15bpThe report says the market is pricing about 15bp for the April ECB meeting and will remain sensitive to the conflict path.
• Expected 10-year BTP-OAT spreadTighten by about 10bpGoldman expects the 10-year BTP-OAT spread to compress by about 10bp versus current levels.
• Forecast 10-year Gilt yield at end-20264.40%The report still expects the 10-year UK Gilt yield to be 4.40% by end-2026.

Impact & implications

For investment implications, the report is not simply a bet on yields falling in a straight line; instead, it emphasizes choosing more robust expressions in an environment where tail risk remains open. Long U.S. real rates are more defensive than long nominal rates; an EUR front-end flattener is better suited to a re-escalation scenario; BTP relative value offers more asymmetric upside if volatility stabilizes or the situation de-escalates; and Gilts could perform relatively well within G10 if there is a credible de-escalation and oil prices fall.

Risks

• Conflict escalation that pushes energy prices higher again and re-raises inflation and hawkish-policy tail risk.
• Financial conditions easing too early, moving the market farther from the growth-risk turning point and re-exposing it to higher-yield risk.
• A weaker U.S. Treasury demand structure, including lower foreign official demand, unhedged private demand, and lower leveraged demand.
• The April tax-date increase in TGA may push up funding rates such as SOFR and TGCR.
• If ECB, BoE, or Fed communication is more hawkish than expected, it would pressure long-rate positions and curve trades.
• BTP fundamentals are more sensitive to higher energy costs, and if Italian growth weakens, the relative-value view could be undermined.
• Option-selling strategies face the risk of tail volatility rising again and losses widening.

What to watch

• Whether the conflict develops a credible de-escalation path and whether oil prices fall.
• Whether U.S. labor-market and growth data weaken enough to change the balance between inflation and growth risks.
• TGA, SOFR, TGCR, and repo-market pressure around the April 15 tax date.
• Changes in Fed custody holdings of U.S. Treasuries, the dollar, foreign official demand, and private investor demand for USTs.
• April ECB meeting pricing, OIS moves, and the shape of the European front-end curve.
• Whether the BTP-OAT spread tightens by the expected 10bp.
• BoE policy communication and the correlation between UK front-end rates and sterling moves.
• Whether the rates volatility surface continues to migrate from the upper-left toward farther expiries and longer tenors.