If Goldman is right that higher yields reflect structural demand for capital rather than a temporary inflation scare, the pressure on long-dated bonds may prove persistent, keeping term premiums elevated across developed markets. For equities, the read-through is that index-level strength is resting heavily on earnings, so any disappointment from AI-linked leaders could expose valuations that have already compressed. Rising Japanese yields matter beyond Japan, since higher returns at home can draw domestic investors back from overseas markets and support the yen. Australian and UK bonds, already above 5%, stand out as the high-yield end of the developed world, which may support the Australian dollar and sterling on carry grounds. Higher government borrowing tied to energy security also links the bond story to oil, as elevated energy costs feed both fiscal needs and inflation risk.
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Governments and AI builders are both lining up for funding, and Goldman Sachs argues that higher yields are simply the price investors are now charging to stand in that queue.
Summary:
- Goldman Sachs says higher government bond yields have become the global norm, with 10-year yields up in every major developed market this year.
- Since January, 10-year yields have risen by around 100 bps in Japan, about 85 bps in the US and close to 80 bps in both the euro area and the UK.
- UK and Australian 10-year yields are above 5%, while Japan’s is near 3% after years below zero.
- The bank attributes the rise to intensifying competition for capital, as governments borrow for defence, energy security and infrastructure and companies raise record sums for AI infrastructure and data centres.
- Goldman says choosing well now matters as much as market exposure, with bonds once again a real source of return but not always a reliable hedge for stocks.
- The bank says S&P 500 forward valuations have slipped toward April’s lows even as the index sits near record highs, with strong earnings, especially in AI-linked names, masking the pressure.
Goldman Sachs says higher bond yields have become the global norm, arguing that a growing competition for capital, rather than a passing shock, explains why borrowing costs have climbed across every major developed market this year.
In a note, the bank highlighted the breadth of the move. Since January, the 10-year government bond yield has risen by around 100 basis points in Japan, about 85 basis points in the US and close to 80 basis points in both the euro area and the UK. Goldman said five of the six markets it tracks recorded their highest monthly average yield since at least 2019 in September. UK and Australian 10-year yields are now above 5%, while Japan’s is approaching 3%, a striking shift for a market where yields sat below zero for years.
The bank’s explanation centres on demand for funding. Many governments are borrowing more to pay for defence, energy security and infrastructure, while companies are raising record amounts to build AI infrastructure and data centres. Goldman said these combined needs are pushing up demand for capital, and investors are asking for greater compensation to lend. In the bank’s framing, higher yields are what that competition looks like in practice.
That environment, Goldman argues, rewards discrimination over broad exposure. The bank describes selectivity as the new source of excess return, saying that choosing well now matters as much as simply being invested. Higher starting yields have restored bonds as a genuine source of return, Goldman said, although they may not always offer a dependable hedge when stocks fall. Among equities, the bank sees companies that can fund their own growth, or that earn more than their cost of capital, as potentially better positioned.
Goldman also pointed to what it sees as rational behaviour in equity valuations. The forward multiple on the S&P 500 has drifted back toward the lows seen in April, even as the index trades near record highs. In the bank’s view, strong earnings growth, particularly among AI-linked companies, may be masking the valuation pressure that higher yields would otherwise put on share prices.
The implication is that equity strength is increasingly dependent on earnings delivery. If yields stay elevated and profit growth slows, the cushion that has protected headline index levels could thin, leaving investors more exposed to the gap between rising financing costs and corporate returns.
This article was written by Eamonn Sheridan at investinglive.com.