Rates convexity and risk-mitigating strategies for balanced portfolios: Goldman Sachs favors more convex, rate-focused hedges as duration may provide less protection to balanced portfolios.

Overview

Goldman Sachs examines how balanced portfolios can add convexity when long-duration bonds may no longer reliably offset equity drawdowns. Its central case is to use rate-sensitive option structures tailored to recession, rate-relief and inflationary sell-off scenarios rather than rely solely on conventional duration.

Core views

The report says resilient nominal growth, sticky inflation, fiscal concerns and greater competition for capital from AI have shifted market attention from equity risk toward bond risk since the summer. The MOVE-to-VIX ratio has risen from its post-2022 lows at the end of 2025, while unusually high dispersion within equities has kept index equity volatility relatively contained. Bond volatility has accelerated across the curve in recent sessions, and options pricing implies more positive asymmetry for rates: the market-implied probability of higher US 10-year yields exceeds that of lower yields by a gap close to its widest since 2022. Against that backdrop, Goldman Sachs does not expect an immediate return to a simple 60/40 structure in which bonds consistently cushion equity sell-offs. Long-duration bonds historically supplied recession convexity, but the report argues that the room for large declines in long-dated yields may be more limited in a future crisis and that near-term rate volatility could remain elevated. It therefore distinguishes between growth-led shocks, where rates can fall, and inflation or rate-led shocks, where equities and yields can decline and rise together. For a recession or rate-relief outcome, the report favors receiver swaptions on shorter-dated rates. Front-end forward rates have risen strongly year to date while rate volatility remains relatively anchored to macro uncertainty, which Goldman Sachs views as an attractive entry point. The logic is that central banks may respond rapidly to growth weakness, while lower energy prices could also bring near-term rate relief. Based on current pricing, its historical simulation finds a 12-month, 25-delta receiver on one- or two-year USD rates would have generated higher payoffs in prior US recessions than S&P 500 out-of-the-money puts. Long-curve volatility expressions are proposed for more extreme growth or policy tails. For portfolios already carrying substantial long-duration exposure, the report also notes that higher 30-year yields make three-month TLT puts a relatively attractive way to fund protection. The report also identifies rate-sensitive equity options as useful in both directions: they can help in a further energy- or rate-led shock and can participate in a reversal of the recent rate increase. Real Estate, Utilities, Russell and Homebuilders have high beta to Goldman Sachs' PC2 monetary-policy factor relative to their current implied volatility and have sold off sharply over the prior three months. Calls on these sectors are characterized as attractive for a rate-relief reversal; Real Estate implied volatility, and to some extent Russell volatility, is low relative to volatility on 20-year-plus US Treasuries. For the inflation-risk case, Goldman Sachs emphasizes that bonds may provide more carry than protection outside large demand-side growth shocks. With equity-rate correlation still priced near zero, it considers equity-down/rates-up hybrids attractive for balanced portfolios because they specifically target falling equities alongside rising yields. Across the largest three-month 60/40 sell-offs since 1962, 10-year yields rose about 75% of the time and rose by more than 50 basis points half the time. Excluding 1998-2021, when lower inflation made bonds more dependable equity buffers, yields rose by more than 50 basis points 75% of the time—above the strike condition of a 20x hybrid digital contingent on the S&P 500 falling more than 5% over three months. The wider report supports this scenario-based approach with cross-asset screens for implied and realized volatility, correlations, skew, volatility term structure and systematic strategies. It compares option-implied tail probabilities with forward and realized outcomes, examines one-year return against 5% CVaR for 60/40 replacements and option overlays, and ranks cross-asset hedges by factor beta relative to current at-the-money implied volatility. These tools are intended to locate hedges whose sensitivity to global-growth, monetary-policy, energy-price or market-reversal shocks appears high relative to their option cost.

Analysis framework

Goldman Sachs starts with the changing relationship between bond and equity risk, then separates recession/rate-relief, extreme growth-policy, and inflationary equity-down/rates-up scenarios. It compares historical simulated payoffs and drawdowns with current option pricing, while using implied volatility, skew, correlations, CVaR and factor-regression screens to assess which hedges offer the most targeted convexity.

Methodology notes

• Quantitative, Factor, and Portfolio TheoryMulti-factor model

  Three- and five-year regressions on global-growth and monetary-policy principal-component factors.

  The report estimates how assets respond to common growth and policy shocks, then compares factor beta with current at-the-money implied volatility to screen for relatively efficient hedges.

• Other

  1-year return and 5% CVaR comparisons for 60/40 replacements, systematic strategies and option overlays.

  The report compares return with expected losses in the worst 5% of outcomes to evaluate the risk-mitigation trade-off of alternative portfolio structures.

Asset mapping & comparison

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

• Short-dated USD receiver swaptions

  Recession and rate-relief hedge

  Strengths

  Potentially benefits from responsive central-bank easing and lower-energy-price rate relief.

  Comparison

  The report's historical simulation shows higher recession payoffs than S&P 500 out-of-the-money puts, based on current pricing.

• TLT puts

  Protection for portfolios with greater long-duration exposure

  Strengths

  Higher 30-year yields can better fund put protection.

  Comparison

  Presented as tactically attractive relative to history.

• Real Estate, Utilities, Russell and Homebuilders options

  Hedge for rate-led shocks or a rate-relief reversal

  Strengths

  High beta to the monetary-policy factor relative to implied volatility; these groups sold off sharply over the prior three months.

  Comparison

  Real Estate implied volatility, and to some extent Russell volatility, is low relative to 20-year-plus US Treasury volatility.

• Equity-down/rates-up hybrids

  Inflation-risk hedge for 60/40 portfolios

  Strengths

  Targets equity losses occurring alongside rising yields.

  Comparison

  Historical 60/40 drawdowns outside 1998-2021 frequently coincided with yields rising more than 50 bps.

Key data

• US 10-year yield asymmetryProbability gap close to its widest level since 2022Market pricing implies a higher probability of rising than falling US 10-year yields.
• Historical 60/40 sell-offsc.75%Since 1962, 10-year yields increased in roughly 75% of the largest three-month 60/40 sell-offs.
• Historical 60/40 sell-offs50%10-year yields rose by more than 50 bps in half of the largest three-month 60/40 sell-offs since 1962.
• Post-1998-2021 historical sell-offs75%Excluding 1998-2021, 10-year yields rose by more than 50 bps in 75% of the largest three-month 60/40 sell-offs.
• Receiver simulation12-month 25-delta receiver on 1-year or 2-year USD ratesBased on current pricing, the report finds higher prior-recession payoffs than S&P 500 out-of-the-money puts.

Impact & implications

The report's implication is that balanced portfolios may need more explicit convexity rather than relying on duration alone. It links front-end rate receivers to growth and rate-relief shocks, rate-sensitive equity calls to falling-yield reversals, and equity-down/rates-up hybrids to inflationary drawdowns.