Overview
Goldman Sachs finds that current rates markets are reflecting a reduction in volatility and a pullback in tail-risk pricing, a dynamic that has coincided with easing stress in risk assets and commodity flows anticipating a restart of shipments through the Strait of Hormuz. The firm highlights this shift against a backdrop of lower perceived central bank urgency and a higher inflation baseline.
Near-term picture for US yields
While the bank's medium-term projections for inflation and the labor market leave room for US yields to decline over time, Goldman expects a near-term outcome in which yields settle above the levels seen prior to the conflict. The combination of a higher inflation baseline and reduced central-bank pressure contributes to that view.
Implications for trading strategies
Goldman suggests that a mix of stable policy and dampened growth risks can be conducive to carry trades, making strategies such as swap spread long positions or volatility selling more attractive. The bank cautions, however, that the rapidity of volatility compression in volatility-selling strategies argues for overlay hedges to manage the pace of market moves.
European and UK dynamics
In Europe, a narrowing path for the European Central Bank has coincided with continued declines in volatility. Goldman points to strategies like selling payer skew and taking long positions in sovereign credit as offering reasonable risk-reward for markets seeking further relief.
For the United Kingdom, the bank recommends maintaining long positions concentrated at short maturities, given the possible risks to the Gilt term premium that could arise if conditions change.
Japan and the curve
Goldman also notes that long-end Japanese yields are acting as a pressure-relief valve. The interaction of persistent Bank of Japan dovishness and higher inflation pricing has contributed to a bear-steepening of the Japanese yield curve, easing some cross-market pressures.
The bank's assessment leaves open a medium-term path to lower yields, but stresses that near-term levels are likely to remain elevated relative to pre-conflict benchmarks.