Global interest-rate markets and yield-curve opportunities: Goldman Sachs sees technical support building for rates after the global selloff

Overview

This Global Rates Trader report reviews the technical global rates selloff and assesses relative-value and curve opportunities across major G10 markets. Goldman Sachs argues that US duration has become more attractive after the selloff, while energy risk, policy uncertainty and country-specific fiscal concerns keep the regional outlook uneven.

Core views

Goldman Sachs characterizes the latest global selloff as increasingly technical rather than fundamentally driven. Energy risks remain elevated, but PMIs did not alter its assessment of healthy, near-trend growth. The prior combination of rising yields and stable volatility broke down into a less orderly move, stopping out its short-volatility recommendation. Against this backdrop, the firm sees a growing case that yields have overshot: US 5y5y rates are close to one standard deviation above its model-implied fair value, while real-money investors have built a duration underweight that historically corresponds on average to a 10bp decline in 10-year Treasury yields over the next three months. Weak Treasury auctions are viewed more as a symptom of reluctance to add duration than as the primary cause of the move. A credible decline in energy volatility or evidence of rising growth risks is identified as the needed catalyst for duration relief. For the US curve, Goldman Sachs expects the period around the first Fed hike to favor front-end flattening in 2s5s more than belly flattening in 5s10s. It notes that 90-95bp of hikes priced over the next year exceeds its economists' forecast, SEP-dot ranges and survey projections. Higher front-end volatility and reduced hedge value of front-end longs explain about one additional hike relative to survey measures, but an additional full hike remains unexplained if surveys have incorporated about 40bp of hikes since the September FOMC. The firm therefore sees near-term hike asymmetry as a limit on very front-end rallies even while broader duration valuation and positioning favor lower yields. It also argues that investing Treasury General Account cash in repo could smooth funding volatility and potentially compress Bills-OIS through an additional liquidity backstop, although direct lending returns would likely be marginal because TGCR has rarely exceeded IORB this year. In Canada, the selloff has left the CAD front end with the steepest Z6/Z7 slope and the greatest cumulative end-2027 hike pricing in G10. Goldman Sachs recognizes risks that the Bank of Canada could tighten earlier and more forcefully if inflation, neutral-rate estimates and recovery prospects rise together. However, with core inflation around 2%, its economists retain a more benign baseline of gradual movement toward neutral. The report therefore favors CAD curve steepening relative to the USD curve, while flagging a forceful hawkish October BoC follow-through as a risk. In Europe, Goldman Sachs considers French OAT widening disproportionate to changes in deficit expectations and near-term political risk, with idiosyncratic underperformance beyond prior extremes. The firm cautions that such weakness does not automatically precede tightening, citing June 2024 as an episode in which widening converged toward fundamentals. Still, the extreme move and the time remaining before presidential elections improve near-term OAT risk/reward and tilt outcomes toward consolidation. The principal risk is that further global yield increases worsen France's debt-sustainability arithmetic; record-high correlation between the 10-year OAT-Bund spread and 10-year Treasuries implies that global duration relief may be required for stabilization. For the euro curve, the report views recent five-year underperformance as excessive. Euro-area PMIs beat expectations and reached a 41-month high, supporting a resilient-growth narrative and a higher perceived neutral rate, while energy risk remains acute. Yet Goldman Sachs argues that the 10bp cheapening in five-year rates on the 2s5s10s fly is inconsistent with the ECB's relatively low inflation tolerance. Although pricing is above its economists' baseline of one additional ECB hike in December, the firm expects pricing to become more front-loaded and less differentiated between projection and non-projection meetings, reinforcing curve flatness and reversing part of five-year underperformance. For the UK, the report says front-end Gilts are increasingly governed by energy and refined-product prices, so further energy risk should bring additional front-end flattening. At longer maturities, the Bank of England's QT announcement has reduced term premium, but fiscal pressure remains significant: public-sector net borrowing is 7 percentage points ahead of the OBR's year-to-date profile. Goldman Sachs expects uncertainty ahead of the Autumn Budget to limit any further compression in Gilt risk premia until the fiscal picture is clearer. Elsewhere in Europe, the firm recommends paying CHF 1y1y versus EUR 1y1y. The SNB held rates and only modestly lifted medium-term inflation projections, while Goldman Sachs economists expect it to remain on hold. However, expected CHF weakness could eventually raise imported inflation and support catch-up in CHF front-end pricing. The Riksbank, by contrast, adopted a more hawkish tone, materially raising inflation and policy-rate projections; Goldman Sachs expects a first hike in December 2026 followed by two hikes in 2027, a configuration that should continue to flatten the SEK curve. Norges Bank delivered the expected 25bp hike and retained a tightening bias. In Japan, Goldman Sachs sees the JGB belly, especially five-years, continuing to bear the main cheapening pressure. More hawkish Bank of Japan pricing has stabilized the 10s30s curve but shifted pressure from fiscal risk toward 2s and 5s, according to long-end curves and swap spreads. Repeated official intervention in USD/JPY leaves rates as the release valve for domestic and global macro pressure, and concern that the BoJ will not fall behind expected Fed hikes could amplify front-end-rate pressure. The firm therefore continues to favor paying five-years on the 2s5s10s JGB fly. In Australia, a slightly weaker labor report provided temporary front-end relief, but unemployment only rose to the RBA's neutral estimate and does not, in Goldman Sachs' view, undermine expectations of further hikes. Its economists expect a 25bp hike at the next meeting. Current market pricing implies roughly three more hikes than the endpoint of the previous cycle and policy levels last seen before the global financial crisis, when inflation was about one percentage point higher. Goldman Sachs sees asymmetry toward RBA under-delivery versus that pricing, despite energy-related duration pressure, raises its YE2026 10-year yield forecast to 5.0% from 4.7%, and prefers receiving five-years on the 2s5s10s fly over outright long positions.

Analysis framework

Goldman Sachs combines model-implied rate valuation, positioning indicators, historical hiking-cycle curve behavior, survey-versus-market policy pricing comparisons, central-bank communication, macro data and country-specific fiscal or political conditions. It then translates those inputs into relative curve and cross-market trade views.

Methodology notes

• OtherYield curve analysis

  Yield-curve and relative-value analysis

  The report compares movements in curve segments such as 2s5s, 5s10s and 2s5s10s flies to identify where policy expectations, energy risk and risk premia may be mispriced.

• Event-Driven and Behavioral FinanceFund-Flow and Positioning Analysis

  Duration positioning analysis

  Goldman Sachs uses real-money and futures positioning to assess whether extreme duration underweights may create scope for a rates rally.

• Other

  Model-implied fair-value and survey-based policy-pricing comparison

  The report compares observed rates pricing with its fair-value model, economist forecasts and surveys, then attributes part of the gap to volatility and hedge-value effects.

Asset mapping & comparison

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

• US Treasury rates

  Goldman Sachs sees an asymmetric case for lower yields after the selloff, while favoring front-end flattening around the first Fed hike.

  Strengths

  Stretched valuation and extreme duration underweight positioning support potential duration relief.

  Weaknesses

  A catalyst is still needed to revive duration demand.

  Comparison

  The report prefers 2s5s flattening to 5s10s flattening in the post-first-hike window.

  Risks

  Persistent energy volatility and continued hike asymmetry could constrain rallies.

• French OATs

  The report sees improved near-term risk/reward after extreme idiosyncratic widening.

  Strengths

  Underperformance has exceeded prior extremes and the presidential election is still distant.

  Weaknesses

  Idiosyncratic weakness does not necessarily predict subsequent spread tightening.

  Comparison

  The widening is viewed as disproportionate to changes in deficit expectations and near-term political risk.

  Risks

  Rising global yields could impair French debt-sustainability arithmetic.

• CHF 1y1y vs EUR 1y1y

  Goldman Sachs recommends paying CHF 1y1y versus EUR 1y1y.

  Strengths

  Further CHF weakness could lift imported inflation and support catch-up in CHF front-end pricing.

  Weaknesses

  The SNB is expected to remain on hold for the foreseeable future.

  Comparison

  The view contrasts with a more hawkish Riksbank outlook.

• JGB 2s5s10s fly

  Goldman Sachs continues to favor paying five-years on the JGB fly.

  Strengths

  It captures the shift of cheapening pressure toward the belly as BoJ pricing turns more hawkish.

  Comparison

  Long-end curves and swap spreads suggest current cheapening is more monetary-policy driven than fiscal-risk driven.

  Risks

  Global and domestic macro pressure could continue to affect Japanese rates.

• AUD 2s5s10s fly

  Goldman Sachs prefers receiving five-years on the fly rather than holding outright longs.

  Strengths

  Current pricing appears to leave limited room for further RBA tightening.

  Weaknesses

  The broader duration backdrop remains challenged by energy-price volatility.

  Comparison

  The fly is at the cheaper end of its last two years' range.

  Risks

  A stronger-than-expected RBA tightening path could challenge the view.

Key data

• US 5y5y valuationClose to 1 standard deviation above model-implied fair valueGoldman Sachs cites this as evidence that yields may be overshooting.
• Duration-positioning signal10bp decline in 10-year UST yields over the next three monthsAverage historical outcome at the cited duration-underweight threshold.
• Fed hikes priced over next year90-95bpAbove Goldman Sachs economists' forecast, SEP-dot ranges and survey projections.
• Unexplained front-end policy premiumAnother full hikeRemains unexplained after volatility and hedge value account for about one additional hike.
• UK public-sector net borrowing7pp ahead of OBR's year-to-date profileSupports the report's view that fiscal pressure limits further Gilt risk-premium compression.
• Australia YE2026 10-year yield forecast5.0%Raised from 4.7% to reflect the updated policy path.

Impact & implications

The report's central implication is that stretched US valuation and crowded duration underweights improve the case for lower yields once a catalyst emerges, but the opportunity is better expressed through selected curve structures than a uniform global duration call. Regional differences in energy exposure, central-bank reaction functions, fiscal conditions and political risk drive the recommended relative-value positions.

Risks

• Energy volatility may remain elevated and delay the catalyst needed for US duration relief.
• A forceful hawkish follow-through at the Bank of Canada's October meeting could challenge the CAD curve-steepening view.
• Further global yield increases could worsen France's debt-sustainability arithmetic and delay OAT stabilization.
• UK fiscal uncertainty ahead of the Autumn Budget may keep Gilt risk premia elevated.
• More persistent inflation could prompt additional Norges Bank tightening.

What to watch

• Evidence of reduced energy volatility or mounting growth risks as potential catalysts for lower US yields.
• Fed policy pricing relative to surveys, volatility and the hedge value of front-end rates.
• Implementation details of possible Treasury General Account repo investment.
• The Bank of Canada's October meeting and inflation developments.
• French political developments, global duration conditions and OAT-Bund spread sensitivity to US yields.
• Energy-price developments, the UK Autumn Budget and public-sector borrowing.
• RBA communication on the expected endpoint of tightening.