Long-end rate pressure is macro-driven rather than supply-driven, and expanded US buybacks are unlikely to reverse global bond-market volatility

Overview

The report examines whether expanded US buybacks of long-dated Treasuries can alleviate the recent rise in global long-end yields and compares the US market with Europe, the UK, Australia, and New Zealand. Goldman Sachs' central conclusion is that the recent selloff has been driven primarily by macro fundamentals, term premia, and cross-market spillovers, while the direct impact of supply adjustments is limited. It therefore considers curve and cross-market relative-value trades more appropriate vehicles for expressing its views.

Core views

The US Treasury decided to double the size of each 10- to 30-year Treasury buyback from $2 billion to $4 billion and conduct seven operations during the remainder of the quarter. The announcement briefly alleviated the selloff, but the effect was short-lived. Goldman Sachs believes the recent rise in long-end yields was not caused by difficulty absorbing Treasury supply. Instead, cyclical resilience, the repricing of the Federal Reserve's policy path since the beginning of the year, AI capital expenditure and related optimism about long-term growth, fiscal pressures, and spillovers from overseas rates have collectively raised the justified level of long-end yields. Policy uncertainty, energy risks, and the longer-term issuance trajectory have also increased term premia, leaving investors reluctant to add duration during the selloff. Even after the recent adjustment, long-dated US Treasuries have not deviated materially from these macro fundamentals. Expanded buybacks will reduce the amount of long-end duration the market must absorb, but Goldman Sachs expects the direct price impact to be small. The report assumes that all incremental buybacks will be funded through increased Treasury bill issuance. Because funding conditions remain relatively accommodative, the additional front-end supply should have only a limited impact on funding markets and front-end swap spreads. Goldman Sachs' previous quantitative-easing estimates indicate that purchases of US Treasuries equivalent to 1% of GDP could lower the 10-year yield by approximately 4bp, but roughly half of that effect comes from policy-rate guidance. The effect of pure duration removal is therefore closer to 2bp for each 1% of GDP. The incremental size of these buybacks is far below that scale and is unlikely to materially reset the level of rates. By comparison, the impact of reduced long-end supply on swap spreads may be more persistent than its impact on outright yields. The report compares buybacks to foreign-exchange intervention: they can temporarily constrain market levels and volatility but cannot sustainably change the market when macro forces are moving in the opposite direction, and pressure may shift to the intermediate segment of the yield curve or the exchange rate. The Federal Reserve's Operation Twist was more effective not only because it removed duration but also because it provided policy-rate guidance; Treasury buybacks lack this channel. Factors capable of delivering genuine rate relief remain better inflation data, diminished cyclical optimism, or reduced monetary-policy uncertainty. Underweight duration positioning among real-money investors could provide technical support, but Goldman Sachs believes investors will not materially restore duration demand without a catalyst. The report notes that if Fed Chair Warsh clarifies the reaction function at next week's Jackson Hole meeting, it could prompt short-term consolidation and remove one source of pressure. Nevertheless, Goldman Sachs still sees several paths through which the belly of the US curve could underperform and continues to favor US steepening exposure relative to Europe. Global rate linkages are keeping a higher floor under long-end yields across markets. Goldman Sachs' spillover framework shows that the US long-end selloff has both significant domestic drivers and exposure to overseas shocks. Restricted UK natural-gas flows and fiscal uncertainty have exported bearish pressure from UK rates to the US, while cumulative shocks from the Japanese market this year have also been unfavorable for US Treasuries. If energy risks decline, near-term inflation risks may weaken and the value of duration assets as portfolio diversifiers may recover. However, until country-specific macro risks and structural pressures change, cross-market spillovers will continue to constrain the downside in global long-end yields. European rates are simultaneously under pressure at both ends of the curve: upside risks to natural-gas prices are sustaining elevated near-term rate-hike pricing, while recent bond supply and the global selloff are pushing up long-end yields. German fiscal easing has strengthened Euro-area economic resilience and could constrain the market's ability to price future rate cuts, particularly in an environment where pressure on global yields keeps curves steep. However, the market currently prices approximately 60bp of ECB rate hikes through next June, above Goldman Sachs' baseline expectation of one additional hike in September. The report therefore believes the European 2s5s curve could flatten more significantly than the US curve under a range of scenarios. Long-dated French OATs have underperformed during the global selloff, reflecting continued market attention to fiscal risks. Goldman Sachs notes, however, that the recent fiscal deterioration across the EMU-4 since the second quarter has generally been gradual and relatively modest outside Germany, while France's 2027 deficit expectations have remained broadly stable this year. Political risks in 2027 could keep the OAT risk premium sticky, but current pricing already reflects underlying fiscal risks relatively fully. In the UK, energy prices have pushed up front-end yields, but the latest labor-market and inflation data have not changed Goldman Sachs' macro view: given weak employment levels and slowing private-sector wage growth, the Bank of England is unlikely to raise rates. Goldman Sachs expects global duration weakness to drive further steepening in the UK 2s10s curve. Its estimate of the 10-year term premium is close to recent highs, but the UK country-risk indicator has declined since the second quarter, suggesting that the latest move primarily reflects a global bond-market shock rather than UK-specific fiscal risk. Since 2025, the UK has reduced long-dated gilt supply to multi-decade lows. Although this has supported long-dated gilts on an asset-swap basis, it has not prevented outright yields from remaining high, again demonstrating that macro factors outweigh supply adjustments. As market attention shifts toward the autumn budget, UK risk premia may remain sticky, and Goldman Sachs therefore continues to favor sterling curve steepening. Australia's labor-market report was weak, with the unemployment rate rising slightly, and Goldman Sachs economists also expect softer July inflation data, but Australian rates were still broadly unchanged during the week. The report believes that overseas spillovers, including higher US yields, have constrained the decline in Australian yields in recent months. Nevertheless, the moderate data outlook and relatively cheap valuations should ultimately support Australian duration, so it maintains its recommendation to receive 10-year Australian rates. The trade has an entry level of 5.10, a latest level of 5.18, a stop of 5.25, a target of 4.80, and current performance of -8bp. In New Zealand, market pricing for rate hikes through year-end has fallen from a July peak of 140bp to 80bp, but remains above Goldman Sachs economists' baseline of two hikes. Given that labor-market slack should be sufficient to constrain the tightening path, Goldman Sachs continues to favor a New Zealand 2s10s steepener and has extended the target and raised the stop. The trade has an entry level of 0.72, a latest level of 0.81, a stop of 0.80, a target of 0.95, and performance of +9bp. The report also closes a relative-value trade paying JPY 5y5y and receiving EUR 5y5y OIS after it reached the revised stop, with a potential return of 0bp. The forecast table shows that Goldman Sachs expects the US 10-year yield to fall from a spot level of 4.69 to 4.45 in the third quarter of 2026 and 4.25 in the fourth quarter of 2027 and first quarter of 2028. It expects the UK yield to decline from 5.06 to 4.30 by the first quarter of 2028, Australia's from 5.06 to 4.50, New Zealand's from 4.75 to 4.50, and Japan's from 2.89 to 2.20. Meanwhile, estimated US Treasury duration supply rises from $2.795 trillion in 2026 to $2.929 trillion in 2027 on a 10-year-equivalent basis. This combination shows that the report is not forecasting a sustained one-way rise in all long-end yields. Instead, it emphasizes that near-term macro risks are keeping the yield floor elevated, that supply adjustments alone cannot rapidly relieve the pressure, and that curve and cross-market relative-value expressions are therefore preferable.

Analysis framework

Goldman Sachs first distinguishes whether changes in long-end yields stem from supply-demand imbalances or macro factors, then uses empirical estimates of duration removal to assess the direct impact of buybacks and compares Treasury buybacks with the Federal Reserve's Operation Twist, which included policy guidance. The report subsequently uses term-premium decomposition and a cross-market spillover framework to identify shock transmission among the US, UK, Japan, and Europe. It then compares market-implied central-bank hiking paths with Goldman Sachs economists' baseline forecasts, ultimately forming curve and relative-value trade views across the US, Europe, the UK, Australia, and New Zealand.

Methodology notes

• Fixed Income and Credit AnalysisYield curve analysis

  2s5s and 2s10s curve trades

  The report compares changes in yields across maturities and uses steepening or flattening trades to express views on policy paths, macro risks, and long-end pressure, while also comparing the relative performance of US and European curves.

• Fixed Income and Credit Analysis

  GS term-premium decomposition

  This method separates changes in long-term yields into rate expectations and the term compensation investors require for holding long-dated bonds, helping determine whether the recent increase stems from UK-specific risks or broader global shocks.

• Fixed Income and Credit Analysis

  Global rate spillover framework

  The report uses this framework to separate domestic and overseas drivers of the US long-end selloff and identify the transmission of UK and Japanese market shocks to US Treasury yields.

• Fixed Income and Credit Analysis

  Duration-removal rule of thumb

  The report uses historical estimates of the impact on the 10-year yield from purchasing US Treasuries equivalent to 1% of GDP and removes the contribution from policy guidance to estimate the pure supply impact of expanded Treasury buybacks.

• Event Games and Behavioral FinanceEvent-driven analysis

  Analysis of Treasury buyback announcements and central-bank communication events

  The report observes the brief market reaction following the buyback announcement and assesses the potential short-term rate impact if the Federal Reserve's reaction function is clarified at the Jackson Hole meeting.

• Event Games and Behavioral FinanceExpectation Gap/Expectation Management

  Comparison of market-implied hiking paths with Goldman Sachs baseline forecasts

  The report compares the amount of tightening priced by European and New Zealand markets with Goldman Sachs economists' baseline paths to determine which curve maturities embed excessive tightening premia.

Asset mapping & comparison

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

• US Treasuries

  Expanded long-end buybacks provide only marginal support, while macro fundamentals and global spillovers continue to dominate yields.

  Strengths

  Real-money duration positioning is light and could translate into demand support if a clear catalyst emerges.

  Weaknesses

  Cyclical resilience, policy-path repricing, fiscal pressures, energy risks, and the issuance trajectory are raising yields and term premia.

  Comparison

  Goldman Sachs favors a US 2s5s steepener relative to a European 2s5s flattener.

  Risks

  Rates could experience more substantial relief if the Federal Reserve's reaction function becomes clearer, inflation improves, or cyclical expectations cool.

• Euro-area Rates

  The front end is affected by natural-gas and rate-hike risks, while the long end is affected by supply and the global selloff.

  Strengths

  The market prices approximately 60bp of hikes, above Goldman Sachs' baseline path, creating scope for the relative flattening view.

  Weaknesses

  German fiscal easing is strengthening economic resilience and may constrain future rate-cut pricing.

  Comparison

  The report expects European 2s5s to flatten more significantly than US 2s5s under a range of scenarios.

  Risks

  Higher natural-gas prices and pressure on global long-end yields could continue to push the entire curve higher.

• French OATs

  Long-end underperformance reflects continued market attention to French fiscal risks and political risks in 2027.

  Strengths

  Goldman Sachs believes underlying fiscal risks are already relatively fully reflected in current prices.

  Weaknesses

  Political risks in 2027 will keep risk premia sticky.

  Comparison

  Fiscal deterioration across the EMU-4 has generally been modest, with particularly limited changes outside Germany; France's 2027 deficit expectations have remained broadly stable this year.

  Risks

  Political uncertainty could prolong elevated OAT risk premia.

• UK Gilts and Sterling Rate Curve

  Goldman Sachs continues to favor a 2s10s steepener, believing that global duration weakness and expectations surrounding the autumn budget will keep long-end risk premia sticky.

  Strengths

  Weak employment levels and slowing private-sector wage growth make a Bank of England rate hike unlikely.

  Weaknesses

  Energy prices remain a front-end risk, while outright long-end yields have not declined materially despite reduced supply.

  Comparison

  The UK country-risk indicator has declined since the second quarter, indicating that rising term premia are driven more by global shocks than by UK-specific risks.

  Risks

  The autumn budget and changes in energy prices could again affect UK risk premia.

• Australian 10-year Rates

  Goldman Sachs maintains its recommendation to receive 10-year rates, believing that moderate data and relatively cheap valuations will ultimately support duration.

  Strengths

  The labor market is weakening, and Goldman Sachs economists expect softer July inflation data.

  Weaknesses

  Overseas spillovers, including higher US yields, have constrained the decline in Australian yields.

  Comparison

  Compared with the US, Australia's domestic data are more moderate, but its yields remain constrained by global markets.

  Risks

  Further increases in overseas yields could delay the expected improvement in Australian duration.

• New Zealand 2s10s Rate Curve

  Goldman Sachs continues to favor a steepener to express the view that the actual tightening path may be below market pricing.

  Strengths

  Labor-market slack is sufficient to constrain further tightening.

  Weaknesses

  The market still prices 80bp of hikes through year-end, above the two hikes expected by Goldman Sachs.

  Comparison

  Rate-hike pricing has declined from its July peak of 140bp but has not yet returned to Goldman Sachs' baseline path.

  Risks

  The curve trade could come under pressure if tightening exceeds Goldman Sachs' baseline view.

• Canada 2s10s Rate Curve

  The report's active trades continue to include a Canada 2s10s steepener.

  Strengths

  After entry at 0.53, the latest level is 0.62, for performance of +9bp.

  Comparison

  The target is 0.80 and the stop is 0.58.

Key data

• US long-dated Treasury buybacksIncreased from $2 billion to $4 billion per operation; seven operations during the remainder of the quarterCovers 10- to 30-year Treasuries; despite the doubled size, the report expects a limited market impact
• Estimated impact of duration removal on the US 10-year yieldPurchases of US Treasuries equivalent to 1% of GDP lower the yield by approximately 4bp; pure duration removal accounts for approximately 2bpApproximately half of the total effect comes from the policy-guidance channel embedded in quantitative easing
• ECB rate-hike pricingApproximately 60bp through next JuneAbove Goldman Sachs' baseline expectation of one additional hike in September
• New Zealand year-end rate-hike pricing80bpThe July peak was 140bp; still above the two hikes expected by Goldman Sachs economists
• US 10-year yield forecastSpot 4.69; 3Q26 4.45; 4Q26 4.40; 1Q27 4.35; 2Q27 4.30; 3Q27 4.25; 4Q27 4.25; 1Q28 4.25Goldman Sachs G10 10-year yield forecast
• 10-year yield forecasts for major European marketsGermany: 3.25/2.95/3.00/3.00/3.00/3.00/3.00/3.00; France: 4.10/3.60/3.70/3.75/3.75/3.75/3.75/3.75; Italy: 4.05/3.65/3.75/3.80/3.85/3.90/3.90/3.90; Spain: 3.68/3.35/3.45/3.50/3.55/3.60/3.60/3.60The sequence is spot, 3Q26, 4Q26, 1Q27, 2Q27, 3Q27, 4Q27, and 1Q28
• UK, Japan, and Canada 10-year yield forecastsUK: 5.06/4.60/4.50/4.50/4.40/4.40/4.35/4.30; Japan: 2.89/2.50/2.50/2.45/2.40/2.30/2.25/2.20; Canada: 3.76/3.50/3.50/3.50/3.50/3.50/3.50/3.50The sequence is spot, 3Q26, 4Q26, 1Q27, 2Q27, 3Q27, 4Q27, and 1Q28
• Australia and New Zealand 10-year yield forecastsAustralia: 5.06/4.75/4.70/4.60/4.50/4.50/4.50/4.50; New Zealand: 4.75/4.50/4.50/4.50/4.50/4.50/4.50/4.50The sequence is spot, 3Q26, 4Q26, 1Q27, 2Q27, 3Q27, 4Q27, and 1Q28
• Other G10 10-year yield forecastsSwitzerland: 0.42/0.40/0.50/0.50/0.50/0.50/0.50/0.50; Sweden: 3.02/3.20/3.25/3.25/3.25/3.25/3.25/3.25; Norway: 4.41/4.00/4.00/4.00/4.00/4.00/4.00/4.00The sequence is spot, 3Q26, 4Q26, 1Q27, 2Q27, 3Q27, 4Q27, and 1Q28
• US Treasury duration supply2024: 2765; 2025: 2797; 2026: 2795; 2027: 2929In $ billions of 10-year equivalents; Federal Reserve supply is 0 throughout the table, making net supply equal to gross supply
• Forecast monthly US Treasury auction sizes by end-20272-year FRN 33/30; 2-year 83; 3-year 72; 5-year 84; 7-year 54; 10-year 42/39; 20-year 16/13; 30-year 25/22; 5-year TIPS 28/26; 10-year TIPS 21/19; 30-year TIPS 9/8In $ billions; FRNs, 10-year, 20-year, 30-year, and TIPS are shown as new issue/reopening
• Key active curve tradesGBP 1-year-forward 2s10s: entry 0.38, latest 0.34, stop 0.25, target 0.55, -4bp; New Zealand 2s10s: 0.72/0.81/0.80/0.95, +9bp; Canada 2s10s: 0.53/0.62/0.58/0.80, +9bp; US 2s5s steepener versus European 2s5s flattener: -0.07/-0.03/-0.07/0.10, +4bpEntry, latest, stop, target, and performance are shown in sequence
• Receive Australian 10-year rates tradeEntry 5.10; latest 5.18; stop 5.25; target 4.80; performance -8bpGoldman Sachs maintains the recommendation
• Closed JPY versus EUR 5y5y tradeOpened 20260807, closed 20260820, performance 0bpPay JPY 5y5y and receive EUR 5y5y OIS; reached the revised stop

Impact & implications

The report believes that reducing long-end supply through Treasury buybacks cannot substitute for an improvement in the macro environment. If cyclical resilience, inflation and energy risks, policy uncertainty, and global rate spillovers do not subside, long-end yields will retain a relatively high floor, and market pressure may shift to the belly of the curve or exchange rates. Goldman Sachs therefore primarily expresses its views through US curve trades relative to Europe, UK and New Zealand 2s10s steepeners, and Australian duration rather than betting that US buybacks will sustainably lower global long-end rates.

Risks

• Persistent US cyclical resilience, inflation risks, and monetary-policy uncertainty could continue to push up long-end yields.
• Energy prices and natural-gas supply risks could sustain near-term inflation and rate-hike pressures in the US, Europe, and the UK.
• Global bond-market spillovers could keep a high floor under long-end yields across countries.
• US fiscal pressures and the long-term Treasury issuance trajectory could continue to raise term premia.
• The UK autumn budget and French political risks in 2027 could keep local risk premia sticky.
• Further increases in overseas yields could delay an improvement in Australian duration.

What to watch

• Watch whether Fed Chair Warsh clarifies the policy reaction function at next week's Jackson Hole meeting.
• Watch whether inflation data, cyclical resilience, and monetary-policy uncertainty change sufficiently to restore duration demand.
• Watch whether energy risks and restricted natural-gas flows ease near-term global inflation pressure.
• Watch the gap between the market's pricing of approximately 60bp of ECB rate hikes through next June and Goldman Sachs' baseline expectation of one additional hike in September.
• Watch French political risks in 2027 and the stickiness of OAT risk premia.
• Watch the UK autumn budget and whether the UK country-risk indicator turns.
• Watch Australia's July inflation data and the spillover from overseas yields to Australian rates.
• Watch whether New Zealand year-end rate-hike pricing continues to converge from 80bp toward Goldman Sachs' expected path of two hikes.