Energy shocks are pushing up rate hike pricing, and global rates markets are priced for policy surprises

Overview

This report is Goldman Sachs' global rates strategy weekly, titled “Priced For Surprise.” It focuses on energy price increases, central bank policy communication, G10 yield curves, term premia, volatility, supply, and flows, with emphasis on rates markets in the United States, Canada, Europe, the United Kingdom, Japan, Australia, and New Zealand. The core view is that rising oil and natural gas prices are causing markets to price in more hike risk again, but some front-end pricing has already exceeded Goldman Sachs economists' forecasts, and the next move will depend heavily on central bank communication and whether energy prices continue to rise.

Core views

First, if the Fed's July meeting is priced as the market currently implies, it would create a rare policy “surprise” on a non-cut meeting day; Goldman Sachs economists still expect the Fed to keep policy rates unchanged, but if Chair Warsh lacks clear forward guidance, it could reintroduce inflation risk premia and hit long positions in the belly and long end. Second, European and UK front-end rates are strongly driven by energy prices; short-term momentum may outweigh valuation, but the medium-term preference remains for 2s10s curve steepening. Third, Canada is caught between support from oil prices and trade tariff risks; the report believes front-end hike premia still have room to fade and continues to prefer CAD 2s10s steepeners. Fourth, JGB curve flattening requires a more hawkish and credible BoJ terminal rate signal; otherwise, the long end will remain capped by term premium and concerns about fiscal dominance. Fifth, within Australia and New Zealand, NZD has already reflected hawkish risks relatively fully, while AUD forwards, after an oil-driven selloff, present renewed opportunities for long positioning or front-end flatteners.

Analysis framework

The report uses a strategic framework combining macro policy paths, deviations in market pricing, energy price sensitivity, volatility surface analysis, term premium decomposition, flow and positioning monitoring. It compares Goldman Sachs economists' central bank forecasts with market-implied hiking paths and uses yield curves, OIS, inflation forwards, swap spreads, CFTC positioning, fiscal supply, and G10 10-year yield forecasts to identify trading opportunities.

Methodology notes

• Rates market pricingComparison of central bank path forecasts versus market-implied hikes

  Compare Goldman Sachs economists' baseline forecasts with OIS, Fed funds futures, or market forward pricing

  Used to identify whether front-end rates have already over-reflected hike risk; for example, European front-end rates are above central bank forecasts, Canada has priced 19bp of hikes through December and 50bp through April.

• Volatility analysisPCA decomposition of the USD implied volatility surface

  PCA Decomposition of USD Implied Volatility Surface

  Used to judge whether the energy price shock has transmitted into rates volatility, and whether volatility is shifting from the tail of the curve toward nearer meeting dates.

• Cross-market spilloverRigobon decomposition

  Spillover contribution of global yield repricing to CAD yields

  Used to decompose the external shock contribution from global rates repricing to the rise in Canadian yields, helping assess tactical resistance facing long CAD front-end positions.

• Term structureGS Term Premium Decomposition

  Break G10 10-year yields into expected rates and term premium components

  Used to measure the relative contribution of term premia and policy expectations within recent yield ranges, and to judge whether long-end valuations are cheap enough to trigger a reversal.

Asset mapping & comparison

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

• UST / USD rates

  The main asset through which July Fed policy surprises and inflation risk premia are expressed

  Strengths

  Long-end forwards look somewhat cheap after the recent selloff, and long 3y SOFR swap spreads provide a carry expression.

  Weaknesses

  If the Fed stays on hold but communication is insufficient, it could undermine the credibility repricing after the June FOMC and lift inflation risk premia.

  Comparison

  Compared with Europe and the UK, long-end stability in the US depends more on communication around the Fed's reaction function and whether the energy shock persists.

  Risks

  Further rises in oil prices, meeting-day policy surprises, changes in fiscal supply guidance, weaker front-end demand.

• EUR rates

  A front-end rates market driven by energy prices and expectations for the ECB path

  Strengths

  Goldman Sachs believes the EUR swap curve will ultimately steepen when front-end yields decline, and 1y1y OIS near 3% looks too high.

  Weaknesses

  Sticky European natural gas prices and resilient economic data may delay rate relief.

  Comparison

  Like the UK, it is affected by energy, but the UK also has a more prominent fiscal risk premium overlay.

  Risks

  Further rises in energy prices, catch-up in front-end volatility, higher inflation expectations.

• GBP Gilts / GBP OIS

  A combined expression of energy shocks, BoE policy, and UK fiscal risk

  Strengths

  The report continues to favor UK 2s10s curve steepening over the next 3 months.

  Weaknesses

  Near-end rate direction is still driven by energy prices, and fiscal pressure may keep Gilt risk premia elevated.

  Comparison

  Compared with the euro area, UK fiscal constraints have a stronger impact on long-end risk premia.

  Risks

  Worsening energy shocks, rising expectations for fiscal measures, changes in BoE communication.

• CAD rates

  The Canadian rates market caught between the positive impact of oil prices and trade tariff risks

  Strengths

  Trade risks reduce the probability of the BoC hiking again, leaving room for front-end hike premia to fade.

  Weaknesses

  Higher energy prices and rising global yields create tactical resistance for longs.

  Comparison

  Compared with the US, the CAD front end is more directly affected by trade policy and the BoC's easing bias.

  Risks

  Tariffs being implemented, continued rise in global yields, stronger potential inflation pressures in Canada.

• JGB / JPY rates

  Assets expressing BoJ policy signals, JPY depreciation, and fiscal dominance risk

  Strengths

  If the BoJ signals a higher terminal rate or short-term neutral rate, it may support further curve flattening.

  Weaknesses

  An earlier expected hike date alone may not be sufficient to restrain relative weakness in the 10-year sector and rising term premia.

  Comparison

  The Japanese market depends more on the credibility of the monetary-fiscal policy mix, rather than just expectations for a single hike.

  Risks

  BoJ signaling not hawkish enough, concerns about fiscal dominance, persistently elevated JGB volatility.

• AUD / NZD rates

  An expression of Australian and New Zealand inflation data, oil prices, and central bank hike expectations

  Strengths

  After the selloff in AUD forwards, Goldman Sachs sees renewed value in long positioning or front-end flatteners; in NZD it still favors medium-term 2s10s steepening.

  Weaknesses

  New Zealand's 2Q26 CPI came in above expectations, providing near-term support for front-end rates.

  Comparison

  Hawkish risk pricing is more fully reflected in NZD, while AUD is more likely to see relief after the oil-driven selloff in medium-term forwards.

  Risks

  Inflation continuing to surprise to the upside, RBNZ/RBA turning more hawkish, continued rise in oil prices.

Key data

• Oil price changeAbout 15% increaseSince last week's CPI release, oil prices have risen about 15%, pushing the market from assigning a very low probability of a July hike to pricing in meaningful risk.
• Potential tariff impact on Canada50% tariff on $20bn Canadian goods；effective tariff rate may rise by 2.5ppIf implemented, it is expected to drag Canadian growth by about 0.2pp through lower exports; policy uncertainty and reduced investment could drag a further roughly 0.2pp.
• Canada market rate hike pricing19bp by December；50bp by AprilThe report believes this implies there is still room for front-end hike premia to fade.
• Estimated US net bill supplyAbout $1.2tn-$1.3tn from 3Q26 to 1Q27Heavy bill supply and front-end uncertainty may test short-end demand.
• G10 10-year yield forecast: USDSpot 4.69；3Q26 4.45；4Q26 4.40；1Q28 4.25The table shows Goldman Sachs expects US 10-year yields to decline gradually.
• G10 10-year yield forecast: GBPSpot 5.07；3Q26 4.60；4Q26 4.50；1Q28 4.30Although near-term energy and fiscal risks support Gilt risk premia, the medium-term forecast still points to lower yields.
• New Zealand tightening pricingAbout 120bp of tightening priced over the next yearGoldman Sachs believes this pricing is too high, as core inflation remains within the target range and labor market slack may ease underlying inflation.
• Examples of active tradesLong 3y SOFR swap spread；1y forward 2s10s GBP OIS steepeners；2s10s NZD steepeners；2s10s CAD steepenersThe report lists multiple GS Rates Trades that remain under active tracking.

Impact & implications

For investors, the report suggests that current global rates trading is no longer just a directional duration question, but rather a repricing of curves and volatility driven jointly by energy shocks, central bank communication credibility, fiscal supply, and term premia. If energy continues to rise in the short term, front-end rates and volatility may remain under pressure; but when inflation pressure eases or central banks are unwilling to follow market hike pricing aggressively, fading front-end premia should support 2s10s steepening across multiple markets.

Risks

• Energy prices, especially oil and European natural gas prices, continue to rise, pushing front-end hike pricing and volatility higher.
• Central banks stay on hold but fail to provide a clear explanation of their reaction functions, causing the market to reprice inflation risk premia.
• Changes in US fiscal supply, bill share, and refinancing guidance trigger adverse yield curve reactions.
• UK fiscal pressure and expectations for cost-of-living policies push up Gilt risk premia.
• If Japan lacks signals of a tighter monetary-fiscal policy mix, the JGB long end may remain under pressure.
• Trade tariffs and policy uncertainty may drag Canadian growth and alter the BoC path.

What to watch

• The July FOMC outcome and Chair Warsh's communication on the policy path, inflation risks, and the reaction function.
• Whether oil prices and European natural gas prices continue to rise, and how that transmits into front-end rates and implied volatility.
• Subsequent meetings and official remarks from the ECB, BoE, BoJ, RBNZ, and RBA.
• The US August refunding announcement, bill supply, and Treasury guidance on issuance structure for the next several quarters.
• Whether Canadian tariff policy is implemented and its impact on the BoC's easing bias.
• Changes in G10 2s10s curves, front-end OIS pricing, the USD volatility surface, and CFTC/fund positioning.