G10 long-end pressure remains difficult to dispel: shallow relief likely in the US, Japan still the weakest, and curve steepening set to continue

Overview

The report examines why G10 long-end rates remain under pressure and whether adjustments to issuance structures can alleviate the problem. Its conclusion is that cyclical changes in growth and inflation may produce modest yield declines in some markets, but elevated term premia driven by fiscal supply, energy risks, and AI financing are more persistent, meaning steep curves will remain a defining feature.

Core views

The report first distinguishes between near-term inflation improvement and pressure on long-term bonds. Weakening labor markets in economies such as the US, together with the limited pass-through of previous energy shocks into core inflation, reduce the urgency for central banks to raise rates in the near term, and policy rates may ultimately be lower than current front-end market pricing implies. However, energy prices still dominate day-to-day yield movements, and breakeven inflation rates have risen even as spot inflation has moderated. At the same time, AI-related financing and government deficits are competing for global savings, requiring higher yields to balance supply and demand. G4 30-year yields are at or near their cycle highs, so elevated inflation uncertainty and fiscal pressure may keep term premia sticky and yield curves persistently steep. The report believes that shortening the weighted average maturity of government bond issuance in response to weaker long-end demand is a reasonable but limited micro-level supply adjustment. Over the past year, both the UK Debt Management Office and Japan's Ministry of Finance have substantially reduced long-end issuance and lowered issuance WAM; the US Treasury's increased long-end buybacks are a similar measure. A comparison of the UK's six-month rolling issuance WAM with issuance of bonds with maturities longer than 20 years as a share of GDP shows that these measures can strengthen long-end cash bonds relative to swaps, but have failed to reduce the overall level of yields. Goldman Sachs therefore concludes that issuance structures and buybacks primarily affect local pricing, while only a genuine macroeconomic shift toward low inflation can provide lasting relief for long-end yields. The US is the market that the report considers most likely to receive cyclical relief. The fiscal trajectory and heavy bond supply will not improve quickly, and long-term term premia are also unlikely to fully retrace, so Goldman Sachs's long-term yield forecasts still show forward rates rising over time. However, the trading cycle depends mainly on growth and inflation: its base case is for US growth to run slightly below potential in the second half and for inflation to remain relatively moderate, enough for the Federal Reserve to hike less than market pricing implies or remain on hold, thereby lowering yields over the next few quarters and taking the 10-year US Treasury yield toward its 4.40% forecast for end-2026. The report's model suggests that the US 5-year, 5-year forward yield is currently around fair value, so AI financing and chronic fiscal risks will limit the decline in longer-dated forward rates. Any relief is therefore more likely to be shallow than a sustained bull market. An elevated term premium does not necessarily imply that rates volatility must also be high. The report notes that volatility and risk premia usually move in the same direction, but they have diverged since the peak of the 2022—2023 hiking cycle; even if uncertainty over the Federal Reserve's reaction function pushes up the term premium, the recent increase in volatility has been concentrated mainly at the very front end. By comparing the GDP-weighted G3 yield curve and survey-based term premia with implied volatility, Goldman Sachs argues that the current combination of high premia and low volatility is consistent with conditions commonly observed before the global financial crisis. This leaves room for positive-carry strategies aligned with the macro direction, such as US front-end distributional trades and EUR 5s30s steepeners. The report also argues that the fiscal premium may not necessarily be reflected in swap spreads because measures that help the market absorb government bond supply can support cash bonds relative to swaps even when the duration risk premium remains high. Energy remains the key variable for European rates. European natural gas prices have risen close to new highs, while economic resilience and stronger German fiscal spending mean the risk of additional ECB rate hikes after September cannot be ignored. Unlike the Federal Reserve and the Bank of England, which the report expects to remain on hold, an ECB rate hike in September would likely cause the EUR 2s5s curve to flatten more markedly than its US and UK counterparts. Goldman Sachs believes the ECB responds most rapidly to inflation risks, which should support European long-term forward rates relative to markets such as Japan. It expects the 10-year German government bond yield to decline modestly to 3.0% by end-2026 while volatility remains low, and therefore favors the EUR 5-year, 5-year forward rate, using its positive carry to partly offset the negative carry from short positions in steep curves such as Japan's. The report also believes European sovereign credit can withstand moderate tightening after September, although French politics pose a near-term risk. The current OAT—Bund spread already reflects France's weaker fiscal fundamentals, but further widening cannot be ruled out; consequently, European government bond spread strategies favor the intermediate segment of the Spanish curve or semi-core markets outside France. Using August 26, 2025 as the base date, the charts compare changes in 10-year German and UK government bond yields with Brent and TTF energy prices to illustrate energy transmission. The UK's government bond problem is likewise primarily macroeconomic rather than a matter of budget details themselves. Fiscal headroom under the UK's balanced-budget rule is small relative to the macro volatility that determines that headroom, making fiscal choices and yield risks highly dependent on energy prices. Higher energy prices compress fiscal space through inflation and interest costs while increasing policy uncertainty and risk premia; lower energy prices can release budget headroom and drive a more pronounced contraction in UK government bond risk premia. Goldman Sachs maintains its 4.5% year-end forecast for the 10-year UK government bond yield, but expects volatility in the intermediate segment of the UK curve to be substantially higher than in Europe. The volatility-adjusted view is therefore less optimistic than the headline forecast suggests, and the forecast faces upside risk as the budget announcement approaches. The report believes this weakens the case for holding intermediate- or long-dated UK government bonds and continues to favor a GBP 2s10s steepener. Conditions are not yet in place to buy long-term Japanese government bonds. Earlier BOJ rate hikes would help stabilize the long end eventually, but the market will continue to price further hiking risk until the fiscal and inflation outlooks become clearer; if a September hike establishes a precedent, intermediate-maturity rates could continue rising in the near term. Goldman Sachs raised its end-2026 forecast for the 10-year Japanese government bond yield from 2.5% to 3.0% and states that the current level is approximately 2.5%. The real-rate path implied by this forecast may be difficult to sustain over the long term, increasing the downward asymmetry in future 10-year yields relative to current forward pricing. However, current macro conditions are still insufficient to establish a long position, and Goldman Sachs continues to expect the 10-year Japanese government bond to deliver approximately zero total return by year-end and to be the weakest performer in the G4. Smaller G10 markets exhibit similar curve themes. Trade uncertainty and a large output gap in Canada may cause the Bank of Canada to leave rates unchanged, but spillovers from the US will keep long-term forward rates elevated, supporting a CAD 2s10s steepener. Although the Reserve Bank of New Zealand may raise rates soon, the NZD forward curve already prices substantial hiking risk, and the report still sees relative value in a 2s10s steepener. In Australia, Goldman Sachs expects the Reserve Bank of Australia to hike once more, taking the policy rate to a new cycle high and the highest level in the G10. However, that hike is largely priced in, while the growth and inflation paths and relatively inexpensive long-term forward rates can provide a buffer for duration, making Australian duration one of the more attractive long positions in the G10. Taken together, the report favors EUR 2s5s flattening relative to USD, GBP, CAD, and NZD 2s10s steepeners, and outperformance of EUR and AUD 5-year, 5-year forward rates relative to JPY and GBP. The report's active cross-asset trades also include: short SGD/MYR, initiated at 3.13 on January 24, 2026, with a target of 2.90, a stop of 3.30, and a current value of 3.17; an equal-weighted long position in TRY, NGN, and KZT against USD, initiated at 0% on February 18, 2026, with a revised total-return target of 10%, a stop of 4%, and a current value of 7.5%; long 3-year SOFR swap spreads, initiated at -22.6bp on April 17, 2026, with a carry-inclusive target of -14bp, a stop of -19bp, and a current value of -17.3bp; short USD/EGP, initiated at 0% on April 24, 2026, with a total-return target of 12%, a stop of 5%, and a current value of 9.6%; a one-year forward GBP OIS 2s10s steepener, initiated at 0.38 on May 29, 2026, with a target of 0.55, a stop of 0.25, and a current value of 0.36; long 30-year Indian government bonds, initiated at 7.34% on June 27, 2026, with a target of 6.90%, a stop of 7.65%, and a level of 7.48% as of August 24, 2026; an NZD 2s10s steepener initiated at 72bp, with a revised target of 95bp, a stop of 80bp, and a current value of 81bp; and a CAD 2s10s steepener initiated at 53bp, with a target of 80bp, a revised stop of 58bp, and a current value of 62bp. Other active trades include short AUD/NZD through a 1.1650 put option expiring January 14, 2027, long NIFTY Banks versus short NIFTY Pharma, a SOFR 2s5s steepener relative to European OIS flattening, short PLN/HUF, receiving 10-year AUD swaps, and buying a 6m1y A/A-40/A-80 receiver butterfly; the initiation dates of the final two trades are recorded in the source as August 14, 2016.

Analysis framework

The report first divides rates into front-end policy expectations and long-end term premia, then uses growth, inflation, energy, fiscal supply, and AI financing to explain their divergent directions; it subsequently tests whether shortening issuance WAM and conducting buybacks can change overall yields. Its cross-market section combines yield curve shapes, forward-rate models, fair value, implied volatility, positive and negative carry, and central bank pricing to compare the US, Europe, the UK, Japan, and smaller G10 markets in sequence, thereby forming relative-value expressions.

Methodology notes

• Fixed income and credit analysisThree-factor interest-rate decomposition

  Decomposition of policy-rate expectations, term premia, and macro drivers

  The report attributes short-end rates primarily to central bank policy paths and further links long-end rates to the inflation distribution, fiscal supply, and duration risk premia, thereby explaining why declining policy expectations can coexist with persistent pressure on the long end.

• Fixed income and credit analysisYield curve analysis

  Comparison of 2s5s, 2s10s, 5s30s, and 5-year, 5-year forward rates

  The report uses slopes across different maturities and forward rates to identify central bank policy, long-term fiscal pressure, and cross-market differences, and accordingly expresses flattening, steepening, and relative-performance views.

• Sector/industry analysis frameworkSupply-demand framework

  Government bonds and AI financing competing for global savings

  The report places government deficits, AI-related financing, declining long-end investor demand, and issuance-maturity adjustments within a unified funding supply-demand framework to explain why the market requires higher long-end yields to absorb supply.

• Event-driven strategy and behavioral financeExpectation gaps/expectation management

  Comparison of actual central bank actions with front-end market pricing

  The report compares the future actions of the Federal Reserve, ECB, Bank of England, BOJ, and other central banks with the amount of tightening already priced into forward curves to determine which markets may experience policy undershooting or have already fully priced the expected moves.

• Fixed income and credit analysis

  Joint relative-value analysis of term premia, implied volatility, and carry

  The report compares GDP-weighted G3 term premia with implied volatility to demonstrate that high term premia and low volatility can coexist, then screens for positive-carry curve and forward strategies aligned with the macro direction.

Asset mapping & comparison

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

• 10-year US Treasuries and the USD curve

  Moderate inflation and below-potential growth may lead the Federal Reserve to hike less than market pricing implies, pushing yields toward the 4.40% year-end forecast.

  Strengths

  Cyclical macro data can anchor the curve and produce limited yield declines.

  Weaknesses

  Fiscal supply, AI financing, and sticky term premia limit declines in long-end forward rates.

  Comparison

  Compared with Japan, the US has clearer conditions for cyclical relief, although the report expects the relief to be limited.

  Risks

  Inflation or growth above the base case would undermine the projected path of declining yields.

• German government bonds, EUR 2s5s, and 5y5y

  The ECB's faster response to inflation risks favors EUR 2s5s flattening and supports long-term forward rates.

  Strengths

  Economic resilience, low volatility, and the ECB's reaction function support long-term forward rates.

  Weaknesses

  Higher energy prices would prolong the risk of rate hikes.

  Comparison

  The report expects EUR 2s5s to flatten more markedly than the USD and GBP curves and EUR 5y5y to outperform JPY and GBP.

  Risks

  Energy inflation and further ECB tightening may push yields higher.

• French OATs and European government bond carry

  European credit can generally withstand moderate rate hikes, but French political risks leave the OAT—Bund spread vulnerable to further widening.

  Strengths

  Current spreads already price in France's weaker fiscal fundamentals, while the European growth backdrop remains resilient.

  Weaknesses

  French political uncertainty is higher than in other semi-core markets.

  Comparison

  The report prefers the intermediate segment of the Spanish curve or semi-core European government bonds outside France.

  Risks

  Growing focus on the French presidential election may further widen the OAT—Bund spread.

• UK government bonds and the GBP 2s10s curve

  Limited fiscal headroom keeps UK yields and risk premia highly sensitive to energy prices and changes in global rates.

  Strengths

  When energy prices fall, fiscal space and risk premia can improve substantially.

  Weaknesses

  Elevated volatility in the intermediate segment of the curve limits the risk-adjusted appeal of holding intermediate- and long-dated government bonds.

  Comparison

  UK rates volatility is expected to exceed that of Europe, and the report favors a 2s10s steepener rather than an intermediate- or long-dated bond position.

  Risks

  Higher energy prices and the forthcoming budget may push yields above the forecast path of 4.5%.

• 10-year Japanese government bonds

  The market will continue to price further rate-hike risk, and the year-end yield forecast has been raised to 3.0%.

  Strengths

  If the real-rate path ultimately proves unsustainable, the future downward asymmetry in yields will increase.

  Weaknesses

  Current macro conditions are still insufficient to support a long position, and year-end total return is expected to be approximately zero.

  Comparison

  The report expects the lowest total return in the G4 and favors EUR and AUD 5y5y relative to JPY.

  Risks

  A precedent of BOJ rate hikes and unclear fiscal and inflation outlooks may continue to push intermediate- and long-term rates higher.

• Canadian and New Zealand 2s10s curves

  An unchanged Bank of Canada policy rate and spillovers from the US long end support CAD curve steepening; New Zealand rate-hike risk is already largely priced into the forward curve.

  Strengths

  Both can provide selective positive-carry steepener exposure.

  Weaknesses

  Canada is affected by trade uncertainty, while New Zealand still faces a near-term rate hike.

  Comparison

  Rather than taking outright long-duration positions, the report prefers 2s10s steepeners in both countries.

  Risks

  Central bank policy or growth paths diverging from the base case may alter curve performance.

• Australian duration and AUD 5y5y

  Although the RBA is expected to hike once more, the move is largely priced in and long-term forward rates are relatively inexpensive.

  Strengths

  The growth and inflation outlooks and inexpensive long-end forward pricing can cushion the impact of rate hikes.

  Weaknesses

  The policy rate may still rise to the highest level of this cycle and in the G10.

  Comparison

  The report views Australian duration as one of the more attractive long positions in the G10 and expects AUD 5y5y to outperform JPY and GBP.

  Risks

  Persistently strong inflation or larger-than-expected rate hikes would weaken duration performance.

Key data

• G4 long-end yields30-year yields are at or near their cycle highsCovers the US, Germany, the UK, and Japan, indicating that long-end pressure is global
• 10-year US Treasury forecast4.40%End-2026 forecast, based on growth running slightly below potential in the second half and relatively moderate inflation
• 10-year German government bond forecast3.0%End-2026 forecast; the report expects a modest decline in yields and persistently low volatility
• 10-year UK government bond forecast4.5%Year-end forecast; volatility and upside yield risks remain high because of energy and budget risks
• 10-year Japanese government bond forecast3.0%End-2026 forecast, raised from 2.5%; the main text also states that the current yield is approximately 2.5%
• Expected total return on 10-year Japanese government bondsApproximately zeroThrough year-end, expected to deliver the lowest total return in the G4
• Australian policy-rate pathOne additional rate hike expectedThe rate will reach a new cycle high and become the highest policy rate among G10 economies

Impact & implications

The report's core implication is that G10 bond markets may simultaneously experience declining front-end policy expectations, elevated long-end term premia, and persistently steep curves. Adjustments to issuance maturities are more likely to improve the local performance of cash bonds relative to swaps than to substitute for macroeconomic improvements such as lower inflation. Across markets, the US and Germany have limited room for yields to decline, the UK is more constrained by energy and fiscal volatility, and Japan still lacks the conditions for establishing long-duration positions. The report therefore places greater emphasis on curves, forward rates, carry, and cross-market relative value than on broadly pursuing long-end duration.

Risks

• Persistent competition for global savings from government deficits and AI-related financing may keep long-end yields and term premia above levels indicated by cyclical fundamentals for an extended period.
• Energy-price volatility may raise breakeven inflation, weaken bonds' portfolio-hedging role, and renew rate-hike pressure in Europe and the UK.
• US fiscal risks and heavy bond supply may limit declines in long-term forward rates, making Treasury relief shallower than expected.
• French political uncertainty may cause the OAT—Bund spread to widen further.
• UK budget headroom is limited relative to macro volatility, and higher energy prices may raise government bond risk premia through inflation and interest costs.
• Further BOJ rate hikes and an unclear fiscal and inflation outlook may cause Japanese government bonds to continue lagging other G4 markets.

What to watch

• Monitor whether US growth runs slightly below potential in the second half, whether inflation remains moderate, and whether the Federal Reserve hikes less than market pricing implies.
• Track changes in European natural gas, Brent, and inflation expectations, as well as the transmission of these variables to German and UK long-end yields.
• Watch the ECB's rate-hike actions in September and beyond, and the response of EUR 2s5s relative to the USD and GBP curves.
• Monitor the forthcoming UK budget, available headroom under the fiscal rules, and the impact of energy prices on interest costs.
• Track political risks related to the French presidential election and the OAT—Bund spread.
• Watch whether the BOJ raises rates in September and when Japan's fiscal and inflation outlooks become sufficiently clear to support long-end stability.
• Observe whether shorter issuance WAM or increased buybacks in the US, UK, and Japan merely improve cash bonds relative to swaps or begin to affect overall yields.
• Monitor the extent to which policy actions by the Bank of Canada, Reserve Bank of New Zealand, and Reserve Bank of Australia match the rate hikes already priced into forward curves.