Global rates remain under pressure, but the medium-term value of duration hedges is starting to emerge
AI summary card
Global rates remain under pressure, but the medium-term value of duration hedges is starting to emerge
Goldman Sachs believes geopolitical conflicts, energy supply shocks, inflation risk premia, and synchronized global selling continue to weigh on bonds, but with growth optimism already largely priced in, duration assets such as U.S. Treasuries have become somewhat more attractive as a medium-term hedge against downside tail risk.
- The break of key levels in 10-year and 30-year U.S. yields is not purely a domestic U.S. factor; the report believes the selloff in U.S. Treasuries this year has been largely driven by spillovers from bearish shocks in the UK and Japan.
- U.S. Treasuries have recently provided weaker diversification. The one-month rolling correlation between changes in the 10-year Treasury yield and the S&P 500 is near a multi-year extreme negative, but the value of Treasuries as a medium-term tail hedge is improving.
- The New York Fed has reduced its RMP purchase pace from $25 billion per month to $10 billion; the report expects that if funding markets remain stable, RMP could be cut further to $5 billion per month and held through 1Q27.
- European front-end rates remain influenced by uncertainty over energy flows through the Strait of Hormuz and upward pressure in HICP pricing. The report continues to prefer long Italy, Spain, and France sovereign credit versus OIS, but tightens stop-losses after recent spread tightening.
- In Canada, meeting minutes from the BoC confirmed a dovish bias, and the report prefers 2s5s steepeners over outright longs in Canadian rates.
- In the UK, Gilt risk premia only rose meaningfully after the global selloff. The report believes lower 10-year yields are more likely to come from a lower policy path, so it prefers front-end longs and a short belly position.
- In Japan, BoJ quantitative tightening is likely to continue on its existing path, and the main sources of JGB volatility remain domestic macro risk and a gradual policy-tightening path.
Report interpretation
Overview
This report discusses trading conditions in global rates markets under geopolitical conflict, energy supply risk, inflation risk premia, central bank balance sheet policy, and cross-market spillover pressure. The core view is that upward pressure on global long-end yields has not yet been resolved; a near-term rebound in duration requires a clearer macro turning point or a recovery in energy flows. But because risk assets have already priced in a relatively optimistic growth scenario, and because inflation risk premia in the yield curve are more visible, the value of duration assets such as U.S. Treasuries as a medium-term hedge against downside tail risk is improving.
Core views
The report's main views are: first, the global bond selloff has a pronounced cross-market character, with part of the rise in long-end U.S. yields reflecting spillovers from shocks in the UK and Japan rather than a single U.S. factor; second, supply-side shocks and energy uncertainty will continue to support short-term risk premia, making nominal duration less effective at lowering portfolio volatility; third, in the U.S., if funding costs continue to improve and reserves remain stable at around 11% of bank assets, the RMP pace may slow further; fourth, in Europe, the risk-reward profile of front-end rates is more balanced but volatility remains elevated, while sovereign credit carry remains attractive; fifth, in Canada, dovish BoC rhetoric and a weakening labor market support steepener trades; sixth, in the UK, political and fiscal uncertainty will keep the market attentive, but inflation and the monetary-policy path remain the decisive drivers of Gilt yields; seventh, in Japan, the BoJ is likely to maintain the QT path, and simply adjusting bond purchase pace is unlikely to resolve the macro roots of JGB volatility.
Analysis framework
The report combines cross-market yield comparisons, term-premium decomposition, equity-bond correlations, inflation forwards versus oil price linkages, central bank balance sheet policy, funding-market indicators, fiscal interest-cost analysis, and investor positioning/flow monitoring to assess the sources of risk premia and the best trading expressions across different rates markets.
Methodology notes
Decompose 10-year term-premium shocks in G4 markets into sources such as the UK, the U.S., the euro area, and Japan to determine whether the selloff in U.S. Treasuries is mainly driven by overseas shocks.
The report notes that the selloff in U.S. Treasuries this year has largely reflected bearish shocks from the UK and Japan; therefore, without macro changes such as repricing of the UK policy path or validation of Japan's gradual tightening path, long-end U.S. yields are unlikely to see sustained relief.
Separate the term-premium component from the policy-expectation component in yield moves.
The report uses this framework to examine the sources of long-end pressure in Gilts, JGBs, and U.S. Treasuries, and emphasizes that although UK term premia have risen recently, lower Gilt yields are still more likely to come from a lower front-end policy path.
Compare 2y2y inflation pricing, HICP/PPI-related indicators, and synchronized moves in WTI or energy shocks.
The report argues that energy supply shocks and optimistic growth sentiment have lifted inflation-curve risk premia, but after the recent repricing, the appeal of being long inflation as a hedge has declined and the risk has become more two-sided.
Use the ratio of reserves to bank assets, the relationship between TGCR and IORB, and changes in the TGA and T-bill supply to infer the Fed's RMP pace.
The report believes the recent decline in overnight rates reflects both easing factors driving funding volatility and temporary factors such as the low point in T-bill supply and a decline in the TGA. If, in a stable state, tri-party repo rates are close to but slightly below IORB, RMP still has room to slow further.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- US TreasuriesA medium-term tail-risk hedge, but still under pressure in the short term from global yield increases and supply-side shocks.
- Strengths
- Risk assets have already priced in a growth-optimistic scenario, and the more visible inflation risk premium makes Treasuries a better hedge in a deeper down-move scenario.
- Weaknesses
- Recent daily diversification has been poor, and energy shocks and supply uncertainty may continue to lift risk premia.
- Comparison
- Compared with a single U.S. factor, the report emphasizes the spillover effects of global shocks from the UK and Japan on the UST selloff.
- Risks
- If energy prices keep rising and growth concerns do not reassert themselves, long-end yields may move higher again.
- EUR front-end ratesStill shaped by energy-flow and HICP pricing uncertainty in the short term, with a more balanced risk-reward profile.
- Strengths
- The market has fairly well priced the transmission from headline to core inflation, making additional large tightening harder to justify.
- Weaknesses
- Oil price moves and Strait of Hormuz flow headlines may still drive the front end and Z6 volatility.
- Comparison
- Rather than taking direct directional risk on European front-end rates, the report prefers sovereign credit carry in Italy, Spain, and France versus OIS.
- Risks
- If energy supply shocks intensify, HICP and front-end rates could continue to rise.
- EGBs vs OISThe report continues to recommend long Italy, Spain, and France sovereigns relative to OIS, but with tighter stop-losses.
- Strengths
- Sovereign credit carry remains attractive, and the room for major policy tightening in Europe is seen as limited.
- Weaknesses
- After a strong performance over the past month, the valuation cushion has diminished.
- Comparison
- Preferred to a pure bet on lower European front-end rates.
- Risks
- With spreads already tighter, any renewed energy or inflation shock could trigger pullbacks.
- Canadian rates 2s5s steepenersThe report prefers Canadian 2s5s steepeners rather than outright longs in Canadian rates.
- Strengths
- BoC minutes confirmed a dovish bias, while a weakening labor market and the upcoming USMCA deadline may refocus the market on downside growth risks.
- Weaknesses
- Cross-market longs are already popular, and rising CORRA futures open interest creates positioning risk.
- Comparison
- With the risk of further oil price gains, 2s5s steepeners are more defensive than outright longs.
- Risks
- If global yields continue to rise or Canadian inflation deviates from the BoC's forecast, the steepener trade may come under pressure.
- UK GiltsRisk premia have risen recently, but the report believes lower yields depend more on a lower policy path.
- Strengths
- Pressure on UK assets is milder than in comparable past episodes, and term premia remain relatively contained.
- Weaknesses
- Political and fiscal uncertainty will keep risk premia sticky, and the OBR revision to interest costs is a significant headwind.
- Comparison
- The report prefers front-end longs and a short belly position rather than a simple bet on rapid long-end term-premium compression.
- Risks
- Fiscal-policy uncertainty, funding volatility, and sticky inflation may limit the rebound in Gilts.
- JGBsBoJ QT is likely to stay on its current path, and JGB volatility is mainly driven by domestic macro and policy-normalization risk.
- Strengths
- If the BoJ adjusts the bond-purchase pace, it could provide some localized relief on the supply-demand side.
- Weaknesses
- Funding markets do not show obvious volatility, and the BoJ lacks a strong catalyst to change the QT path.
- Comparison
- Unlike the U.S. and the UK, Japan's pressure is more tied to the BoJ's gradual tightening path and domestic macro risk.
- Risks
- If long-end yields keep rising rapidly while the BoJ maintains QT, JGB volatility may persist.
- Inflation forwardsTheir appeal as a hedge has declined, and the risk has shifted from one-way upside to a more two-sided profile.
- Strengths
- Energy shocks, inventory declines, and AI build-out costs still support the inflation risk premium.
- Weaknesses
- Inflation forwards have already repriced meaningfully and are no longer cheap.
- Comparison
- Compared with the early phase of the conflict, inflation forwards have now caught up with the upside move in oil prices and front-end inflation pricing.
- Risks
- If growth optimism fades, inflation forwards may give back some gains; if disruptions in Hormuz persist, energy prices could still push inflation risk premia higher.
Key data
- Key levels for U.S. long-end yields10y UST above 4.5%, 30y UST above 5.0%The report analyzes this in the context of broad global long-end yield pressures.
- Change in overseas 30-year yieldsThe average 30-year yields in the UK, Japan, and Germany are about 50 bp higher than in 3Q25, when the UST 30y last exceeded 5%Used to show that the rise in U.S. long-end yields is part of a global upward pressure.
- Equity-bond correlationThe latest one-month rolling correlation between changes in the 10y UST yield and changes in the S&P 500 is about -85%Chart estimate, showing that U.S. Treasuries have recently been a weak daily portfolio diversifier.
- New York Fed RMP paceReduced from $25 billion per month to $10 billionThe report expects that if funding markets remain stable, RMP could be cut further to $5 billion per month and held through 1Q27.
- Reserve stability rangeAbout 11% of bank assetsThe report believes this level may be consistent with TGCR running slightly below IORB.
- Initial AI impact on PPIAbout 0.5 percentage pointsGoldman Sachs economists estimate that AI construction-phase costs could initially lift PPI, but the impact on core PCE would mainly show up as measurement error.
- Potential UK T-bill issuance savingsIf the T-bill share rises to around 10%, annual interest costs could fall by about GBP 3 billionThe report says this must be weighed against funding-volatility risk and has limited overall impact on UK rates.
- Revision to UK budget interest costsAverage about GBP 10 billion since 2021Used to show that revisions to interest costs in fiscal forecasts have already been substantial.
- Impact on Canadian settlement balancesMaturing bonds could draw down about 11% of settlement balancesThe report believes the BoC may need to communicate the target range for its balance sheet more clearly.
Impact & implications
In investment terms, the report prefers avoiding an unhedged short-term long-duration position and instead expressing a medium-term bullish duration view through structures that limit further losses from additional selling. U.S. Treasuries remain pressured in the short term by energy and supply-side uncertainty, but if risk assets are challenged by a deeper selloff, or if energy flows show credible improvement, they could become a catalyst for increasing duration exposure. In Europe, front-end policy volatility remains high, while sovereign credit carry is relatively better; in Canada, 2s5s steepeners are preferred over outright longs; in the UK, the path of lower front-end rates matters more than rapid compression of long-end term premia; in Japan, continued BoJ QT will limit supply-demand relief.
Risks
- Geopolitical conflict and uncertainty over energy flows through the Strait of Hormuz could continue to weaken the short-term diversification function of nominal duration.
- If energy prices need to rise further to suppress demand, inflation risk premia may continue to rise.
- The synchronized global selloff in long-end yields may persist in the absence of a macro turning point, especially as spillovers from the UK and Japan continue.
- In funding markets, T-bill supply, TGA rebuilding, and reserve changes may make the recent improvement in financing costs temporary.
- Long positions in some Canadian and European rates trades already show signs of crowding, which could amplify drawdowns.
- Political and fiscal uncertainty in the UK may keep Gilt risk premia sticky.
- If the BoJ maintains QT and Japan's domestic macro risks continue to rise, JGB volatility may remain elevated.
What to watch
- How energy flows through the Strait of Hormuz and oil prices affect inflation forwards, European HICP, and front-end rates.
- Whether U.S. risk assets experience a deeper selloff, which could reactivate growth concerns and increase demand for duration hedges.
- The New York Fed's RMP pace, TGA rebuilding, a return to positive T-bill issuance, and the position of TGCR relative to IORB.
- BoC communication, the Canadian labor market, growth risks related to the USMCA deadline, and changes in CORRA futures positioning.
- European flash PMIs, especially the price components, for guidance on the balance between growth and inflation.
- UK fiscal policy, revisions to interest costs in OBR budget forecasts, Gilt swap spreads, and the behavior of the 10s30s curve.
- The BoJ bond market survey, the May 21-22 Bond Market Group meeting, and the wording on the QT path at the June monetary-policy meeting.