Alright folks, brace yourselves. Goldman Sachs just threw a wrench into the narrative of a swift Federal Reserve pivot. Their rate strategists, led by the sharp George Cole, have significantly bumped up their predictions for US Treasury yields by year-end. What’s driving this? Simply put, they’re smelling trouble – and it’s a potent blend of delayed rate cuts, stubbornly persistent inflation, and a US fiscal situation that’s…well, let’s just say it’s not getting any prettier.
Photo source:confoundedinterest.net
They’re now projecting 3.90% for the 2-year Treasury yield by the end of 2025 (up from a previous 3.30%), and a hefty 4.50% for the 10-year (previously 4.00%). This isn’t just a minor tweak; it’s a clear signal that Goldman believes the market has been too optimistic about the speed and extent of potential Fed easing.
Let’s break down what’s really going on here.
First, the Fed’s ‘higher for longer’ stance is looking less like a temporary pause and more like a strategic recalibration. Expect fewer and smaller rate cuts than initially hoped for.
Second, the economic landscape remains precarious. We’re seeing a challenging trade-off between growth and inflation – a tightrope walk the Fed is struggling to navigate.
Third, and this is huge, the US’s fiscal policy isn’t helping. Government spending and debt levels continue to exert upward pressure on yields.
This increase in yield forecasts is a direct challenge to the ‘soft landing’ scenario. It suggests Goldman anticipates a more resilient (and potentially hotter) economy than many are currently pricing in, demanding higher compensation for holding US debt. Investors should prepare for continued volatility.
