The oil link is the one to watch. In Goldman’s account, the energy shock reaches US Treasuries indirectly, through forced selling in UK and euro-area bonds, which means Gulf supply headlines are now a bond market driver as well as a crude market one. With Brent holding around $100, that pressure is unlikely to ease without a de-escalation or a clear improvement in Middle East flows. Higher Treasury yields also tighten financial conditions for equities, credit and housing, the very adjustment Goldman suggests the market is pushing for. For investors, the bank’s call is a conditional one: yields may look attractive, but the catalyst for a rally has to come from energy or growth, not valuation alone.
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Goldman Sachs thinks the Treasury selloff has gone too far, but it is not ready to call the turn until oil or the US data give way.
Summary:
- Goldman Sachs says the sharp rise in US rates over the past month may be somewhat overdone given its scale
- The bank identifies five drivers: still-loose financial conditions, oil-driven selling in UK and euro-area bonds, strong US data, weak Treasury auctions and technical portfolio flows
- A five-year Treasury auction on 23 September cleared at just over 5%, the highest auction yield for that maturity since June 2006
- Corporate bond supply tied to AI investment has added to the supply imbalance, according to the bank
- Goldman says a drop in energy prices or a reversal in strong growth data may be needed for Treasuries to rally
The recent surge in US interest rates may have gone further than fundamentals justify, Goldman Sachs said in a fixed income note, though the bank cautioned that a meaningful rally in Treasuries may depend on lower energy prices or a turn in the strong run of US economic data.
The bank identified five factors behind the accelerating selloff. The first is financial conditions, which it sees as still relatively loose. In its view, rates are caught in a feedback loop: when equities and credit rally or hold steady, yields are pushed higher to do the tightening that risk assets are not.
The second is geopolitical. Rising oil prices have driven up yields in energy-sensitive economies such as the UK and the euro area, where bond buying had been a popular trade. As yields climbed, some of those positions were closed through stop-outs, automatic exits triggered when losses hit a set threshold, and the selling spilled over into US Treasuries even though the US is less exposed to energy prices.
Strong data is the third factor, with a robust S&P Global purchasing managers’ index and continued very low jobless claims reinforcing a firm economic trend. The fourth is supply. Treasury auctions on 23 September drew weak demand, with the five-year note clearing at just over 5%, the highest yield at a five-year auction since June 2006. Heavy corporate borrowing to fund AI investment has added to the imbalance, Goldman said. Finally, technical flows, including portfolio rebalancing that forces some investors to sell, have added pressure, while volatility has kept potential buyers cautious.
Goldman’s assessment is that the move may be somewhat overdone given its size. But it acknowledged that the catalyst for a reversal is likely to come from outside the bond market, through either a decline in energy prices or weaker growth data.
That leaves Treasuries closely tied to the oil market. With Brent near $100 a barrel amid Middle East supply disruption, and the Federal Reserve having raised rates in September, the conditions Goldman identifies for a rally are not yet in place. Until one of them shifts, attractive yields alone may not be enough to draw buyers back in force.
This article was written by Eamonn Sheridan at investinglive.com.