Global rates traders still struggle to get lasting relief

Overview

This is a Goldman Sachs global rates strategy report covering G10 rate markets including the United States, Europe, UK, Japan, Canada, Scandinavia, and Australia. The key theme is that while growth optimism continues to support risk appetite, US employment data, energy-price swings, inflation transmission, and central bank reaction functions together determine whether rate markets can achieve sustained relief. The authors argue that in the short term, US hawkish upside tail risk is muted, carry remains attractive, but Europe’s front-end still follows energy-price volatility, UK Gilts need lower inflation and more dovish BoE expectations for durable support, and JGBs face a more persistent rise in term premium.

Core views

Core views include: first, the US jobs report has brought the front-end upside tail risk in yields closer to stable territory, with Fed likely to pause longer and the next 25bp cut pushed back to December 2026. Second, rate strategy should remain carry-biased, while seeking relative outperformance opportunities in the 5-year area of the curve. Third, Europe rates remain highly correlated with energy prices and geopolitics in the near term, but wage indicators are stable, ECB communication remains relatively hawkish, and limited fiscal response keeps front-end EGB carry attractive. Fourth, UK Gilts political risk has eased, but the key for yield declines is still a falling medium-term inflation outlook and a dovish shift in BoE path. Fifth, the rise in Japan JGB term premium is more persistent, and the belly of the curve is likely to face increasing cheapening pressure. Sixth, the RBA’s more proactive rate-response in Australia helps stabilize the forward curve and may support yield declines after oil-price normalization.

Analysis framework

The report uses a cross-market rates relative-value framework, combining employment, inflation, energy prices, fiscal supply, central bank reaction functions, term premium, curve shape, carry/rolldown, option volatility, and investor positioning to assess G10 rates markets. The analysis includes both yield forecasts and forward-basis deviations, as well as curve trades, real rates, inflation hedging, payer/receiver options, and hedge construction.

Methodology notes

• Macro rates strategyG10 yield forecast and forward dislocation analysis

  Compare Goldman’s rate forecasts for 2y, 5y, 10y and 30y maturities with the market forward curve to identify directional and relative-value opportunities.

  For example, the report raised the US end-2026 2y and 5y forecast to 3.4% and 3.65%, while keeping the 10y and 30y forecasts unchanged, and compares spot, quarterly forecast, and relative-forward deviations in the G10 10y yield table.

• Curve and relative value2s5s10s fly and 5-year rate beta

  Assess the behavior of curve structure during rate consolidation or rebound through the beta of 2s5s10s fly versus 5-year swap-rate changes.

  Charts show 2s5s10s fly is positively correlated with 5-year swap-rate changes; the report therefore prefers buying 3m5y receiver and expressing it as a 3m2s5s10s receiver fly.

• Carry sourcecarry/rolldown monitoring

  Measure carry across maturities, curves, and butterfly structures as a key source of near-term return in rate trading.

  The report believes that with US short-end hawkish upside risk contained and European volatility possibly easing, carry remains the short-term focus, preferring long US 3-year spread and long front-end EGB carry in Europe.

• Risk premiumterm premium estimation

  Track G4 term premium changes to determine whether rising yields are driven by fundamentals, supply, or policy reaction functions.

  The report notes that G4 term premia have generally risen since 2022, with Japan and the UK increasing most recently; the rise in Japan’s term premium is viewed as more persistent, which underpins Goldman’s upward revision to its JGB forecasts.

• Risk managementTail-risk hedging with options

  Use payer or receiver options to build nonlinear hedges during a rates relief rally or a volatility pullback.

  The report argues that with conflicts unresolved and energy flows still uncertain, declines in yields, volatility, or high-strike skew may offer opportunities to hedge inflation and upside-rate tail risk, especially payer structures in the 3-6 month tenor and 2-5 year area.

Asset mapping & comparison

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

• US Treasuries and USD rates curve

  Core research object and strategy expression market

  Strengths

  Employment data reduce front-end hawkish upside tail risk; Fed is expected to pause longer with limited hike risk, making carry and 5-year relative performance attractive.

  Weaknesses

  Energy prices, CPI breadth, and fiscal supply can still drive intraday volatility; long-end yields remain constrained by supply and term premium.

  Comparison

  Compared with Europe and the UK, the US short-end inflation/employment mix is more helpful for containing near-term upside tails; however, Treasury financing and TGA swings remain unique sources of disruption.

  Risks

  Oil-price rebound, inflation surprise, fiscal financing pressure, and reversal of risk sentiment.

• European sovereigns/EUR front-end rates

  Primary object for carry longs and energy-sensitive trades

  Strengths

  ECB wage-tracker stability, lower second-round inflation risk, and limited fiscal response support a volatility pullback; front-end EGB carry remains attractive.

  Weaknesses

  EUR 1y1y OIS has the highest beta to oil, so the front-end remains exposed to geopolitical conflict and energy-price shocks in the short term.

  Comparison

  Compared with the US, Europe’s front-end is more directly oil-driven; compared with the UK, political and fiscal-risk narrative is somewhat less pronounced.

  Risks

  Energy prices rising again, second-round inflation effects, and ECB communication turning more hawkish than expected.

• UK Gilts

  Sovereign rates market driven by political risk and inflation path

  Strengths

  Initial local election outcomes sit below the political-risk premium already priced in by markets, giving moderate short-term relief.

  Weaknesses

  Medium-term inflation and BoE path remain the core constraint on yield declines, with the belly potentially lagging.

  Comparison

  Compared with Europe and the US, UK had an elevated risk premium beforehand, and durable relief depends more on improved inflation and BoE expectations.

  Risks

  Persistent inflation, BoE not dovish enough, re-pricing of political or fiscal risks.

• Japan JGB

  Key market for rising term premium and upward-revised yield forecasts

  Strengths

  The forecast framework shows 10-year JGB near 2.50% at end-2026 and 2.25% at end-2027, offering a clear path view.

  Weaknesses

  BoJ’s gradual normalization is unlikely to suppress long-end risk premia, so the belly may continue to face cheapening pressure.

  Comparison

  Compared with other G4 markets, Japan’s term premium rise is more pronounced recently, with a clearer degree of misalignment versus fundamentals.

  Risks

  BoJ policy moving too slowly, fiscal risk, supply volatility, and energy shocks pushing up inflation expectations.

• Canada CAD rates curve

  Curve steepener trading object driven by weak labor data

  Strengths

  Unemployment rising to 6.9% and employment rate at a cyclical low support front-end declines and curve steepening.

  Weaknesses

  Oil shocks often have mixed effects on Canada, and trade uncertainty still affects growth judgment.

  Comparison

  Compared with the US, weak Canadian employment data provide a more direct signal toward curve steepening.

  Risks

  Changing transmission of oil shocks, renewed inflation acceleration, trade uncertainty.

• SEK and NOK rates curves

  Nordic relative-value market under central-bank divergence

  Strengths

  Riksbank’s pause versus Norges Bank rate hikes strengthens front-end and curve divergence across the two markets.

  Weaknesses

  Non-asymmetric widening of SEK relative to EUR front-end has weakened; NOK belly remains under pressure.

  Comparison

  Norges Bank is more focused on medium-term inflation outlook and acts earlier, while Riksbank has been more patient after repeated inflation undershoots.

  Risks

  Short-term hawkish re-pricing driven by energy, shifts in inflation expectations, and reversal in central-bank communication.

• Australia AUD rates curve

  Potential duration-positive market after RBA proactive hikes

  Strengths

  RBA’s preemptive inflation response can stabilize the forward curve; if oil prices normalize sooner than assumed or inflation impact is smaller, asymmetry for yield declines is favorable.

  Weaknesses

  A further hike is still expected in the short term; budget and cost-of-living measures could affect how long restrictive policy is maintained.

  Comparison

  Compared with BoJ, RBA’s more proactive inflation response helps contain forward risk premium.

  Risks

  Persistent inflation, budget measures stimulating demand, and another oil-price rise.

Key data

• Fed easing pathThe next 25bp cut is expected in December 2026, followed by another cut in March 2027Previously expected in September and December 2026; the new view reflects a longer pause.
• US end-2026 2y yield forecast3.4%Raised by 20bp from prior estimate.
• US end-2026 5y yield forecast3.65%Raised by 10bp from prior estimate; 10y and 30y year-end forecasts are unchanged.
• US curve trade recommendationBuy 3m5y receiver, construct a 3m2s5s10s receiver fly; start with 1bp running, target 10bp, stop-loss -5bpBased on the directional relationship between fly and rate levels and relative volatility.
• US fiscal financingEstimated available borrowing of USD 1,890 billion in 2Q26, USD 6,710 billion in 3Q26, and end-Q3 TGA balance expected at USD 9,500 billionTreasury also signals end-July cash balance may be near USD 1 trillion.
• US coupon expansion timingExpected to start from May 2027Delayed from February 2027 previously; expected to be limited to 2-7 year maturities and dependent on demand signals.
• Canada unemployment rate6.9%Up 0.4 percentage points year-to-date, with the employment rate down to a cyclical low, supporting steepening risk in the CAD curve.
• Norges Bank policyRaised 25bp; Goldman expects another 25bp hike to 4.5% in SeptemberStrengthens NOK and SEK curve divergence.
• 10-year JGB forecast2.50% at end-2026, 2.25% at end-2027Goldman increased the forecast to reflect a more persistent term premium.
• RBA policyThird consecutive 25bp hike; Goldman expects one more hike this year, most likely in JuneRBA emphasizes upside inflation risk and says 4.35% is less restrictive than in 2024.
• G10 10-year spot yieldsUSD 4.35%, EUR 3.00%, GBP 4.88%, JPY 2.48%, CAD 3.46%, AUD 4.99%From the report’s G10 10-year yield forecast table.
• G10 2026 year-end 10-year forecastsUSD 4.10%, EUR 3.00%, GBP 4.40%, JPY 2.50%, CAD 3.50%, AUD 4.70%Reflects Goldman’s yield-path view for major markets through end-2026.

Impact & implications

For investors, the message is not a simple long or short on global duration, but under a backdrop where rates relief rally lacks persistence, greater focus on carry, curve relative value, and tail-risk hedging. Short-term US upside tail risk in rates has eased, supporting selective receiver positioning and 5-year relative outperformance; Europe and the UK remain more reliant on improvements in energy, inflation, and central bank path; in Japan, BoJ’s gradual normalization and rising term premium make sustained belly cheapening risk more prominent. In cross-market allocation, the report highlights central bank reaction-function divergence: the RBA and Norges Bank respond more front-loaded to inflation risks, while Riksbank and BoJ paths produce asymmetric directionality across domestic curves.

Risks

• Energy prices rebounding again and pushing up inflation expectations, especially affecting the Europe front-end, US CPI, and global inflation-hedge assets.
• Unresolved geopolitical conflict, with ongoing uncertainty in energy flows and supply interruption risk, may again expand payer skew demand and high-strike hedging needs.
• If US CPI comes in broadly above expectations, rather than only energy-sensitive components, upside tail risk for rates may rise again.
• Fiscal supply, TGA balance, and coupon expansion rhythm could cause US long-end and swap spread volatility.
• If UK inflation and BoE path do not turn more dovish, the Gilts relief rally may not persist.
• If BoJ policy remains gradual, JGB term premium and belly cheapening pressure may continue.
• Divergence in central-bank reaction functions could lead to rapid repricing of cross-market relative-value trades.
• Option strategies carry risks of premium decay, volatility pullback, directional misjudgment, and trading costs.

What to watch

• The inflation breadth of the next US CPI release, especially energy-sensitive categories and housing inflation revisions.
• Fed’s reaction to slower hiring, moderate wage growth, and energy-price swings, and whether December 2026 rate-cut expectations remain stable.
• Whether Brent oil price moves toward Goldman’s Q4 forecast of USD 90 per barrel, or declines further if the conflict de-escalates.
• Whether ECB wage-tracking metrics and policy communication continue to suppress second-round inflation concerns.
• UK medium-term inflation expectations, BoE rate path, and Gilt term premia relative to the U.S. and Europe.
• Whether BoJ becomes more proactive toward inflation, fiscal, and oil-price risks, and whether JGB curve belly pressure remains elevated.
• How upcoming Norges Bank and Riksbank policy meetings confirm or revise NOK/SEK curve divergence.
• The impact of RBA’s June decision, Australian budget, and cost-of-living policy on the restrictive rate path.
• US Treasury borrowing estimates, TGA balances, auction sizes, and coupon expansion guidance.
• Positioning indicators and flow measures such as CFTC positioning, bank-held Treasuries, NY Fed custody, and TIC capital flows.