Goldman Sachs: The Markets
2026-05-25 · Hosted by — · Goldman Sachs
Executive Summary
Goldman Sachs real money rates sales trader Phil Lee joins host Chris Hossie on the trading floor to explain the multi-driver case for why long-end interest rates are moving higher and why they are likely to continue rising. Phil cites four concurrent forces — inflation/tariffs/AI cycle uncertainty, resilient risk asset growth, fiscal premium from large government deficits, and global spillover from UK and Japan rate increases. His recommended trade is a 5-year/30-year steepener, with the back end moving higher while the belly of the curve remains anchored, benefiting from fiscal and supply pressures on duration.
Key Stories & Changes
1. Why Rates Are Rising — Four Concurrent Forces
Inflationary pressures: Oil prices, tariffs, near-term AI investment cycles adding uncertainty; investors less confident inflation is departing the Fed’s mandate
Risk asset resilience: Equities and other risk assets performing better than expected; if growth doesn’t slow materially, rates stay restrictive longer
Fiscal premium: US, UK, and Japan all running 6–8% deficits; high supply of government bonds requires additional compensation (term premium) to attract buyers — not a default risk per se, but a structural supply/compensation issue
Global spillover: UK and Japan also experiencing upward rate movement; spills into US Treasuries in sympathy
Net effect: real yields going higher, especially at the long end
2. Fed Policy Outlook
Consensus view shifted from “when and how much will the Fed cut” to “how long will they stay on hold”
In February, 2–3 cuts were priced in; now ~30 bps of cumulative hikes priced into 2027
New chair Warsh context: market expected a more dovish outcome from new chair; data and fiscal dynamics are preventing that
Phil Lee expects the Fed to stay on hold, with rate hikes as a tail risk rather than a base case
3. Economic Risks from Higher Rates
Mortgage rates approaching 6.5% — stifling housing sales and home builder activity
Consumer health concerns: Tax refunds fading, gas prices much higher, healthcare subsidies declining — Goldman economics team flagging personal consumption and savings rate deterioration
K-shaped consumer bifurcation: Upper-income consumers benefiting from equity/risk asset performance; lower-income consumers squeezed by energy and reduced subsidies
4. The Trade — 5/30 Steepener
Phil Lee’s explicit recommendation: 5-year/30-year yield curve steepener
Rationale: 30-year yield continues to rise driven by fiscal premium, term premium, heavy public/private issuance, and fiscal trajectory uncertainty
5-year yield stays relatively anchored as a “pivot point for buying” — market consensus already prices rate hike there
Clients looking at 5% on the 30-year as a target zone to buy; that level has already been exceeded, meaning back-end yield continues to be the pressure point
Can be executed in linear (Treasuries) or vol-conditional (options) format
For 60/40 portfolio managers: the 40 (bonds) is where uncertainty is greatest; recommended approach is “dynamic patience” — investing in carry while waiting for macro clarity
Trends Identified
1. Fiscal Dominance Is Becoming a Permanent Rate Premium
Phil Lee’s most important structural point is that investors are not pricing default risk — they are pricing the structural reality that 6–8% deficits require a larger supply of government bonds that must attract buyers at higher yields. This is not an event risk but a persistent force that will keep the long end elevated regardless of Fed actions on the short end.
2. The 5/30 Steepener as the Expression of the Fiscal Thesis
The recommended trade captures the divergence between a relatively anchored front end (where the Fed has some control and hike expectations are already priced) and a back end driven by supply, fiscal premium, and global spillover that the Fed cannot directly address. A steepening yield curve is historically bullish for banks and financial institutions.
3. Growth Resilience Is a Double-Edged Sword for Rates
Strong equity markets and risk asset performance are simultaneously good news (wealth effect supporting consumption) and bad news for rates (they signal the economy doesn’t need rate cuts, keeping the Fed on hold or pushing toward hikes). This paradox — strong growth keeping rates elevated which eventually stifles growth — is the central macro tension of 2026. —-
Sentiment Analysis
Overall Market Sentiment: Cautiously Bearish on Bonds, Tactically Selective
Goldman Sachs rates perspective is that rates will keep rising, especially at the long end, and that macro uncertainty requires patience rather than hero positioning.
Risk Factors Highlighted
Accelerating fiscal deficits globally: US, UK, and Japan all running 6–8% deficits; supply pressure on government bonds is structural and persistent, not cyclical.
30-year yield above 5%: Clients targeting 5% as the buy level have already seen that level passed; each successive move higher increases stifling effects on the real economy.
Mortgage rate impact on housing: 6.5%+ rates are already creating housing sales gridlock; if rates continue higher, housing construction and related employment could deteriorate materially.
Consumer deterioration via multiple channels: Fading tax refunds, rising gas prices ($96 oil), declining healthcare subsidies — Goldman economics team now officially flagging consumption and savings rate concerns.
QT pace risk: If balance sheet normalization is pursued too aggressively, inter-banking system reserve levels could fall below comfortable minimums (2019 repo market precedent).
Global rate contagion: UK and Japan rate increases are spilling into US Treasuries; a global synchronized rate rise would amplify the stifling effects on growth.
Bull flattening risk: If geopolitical event (Iran deal, risk-off) causes front-end yields to drop and the trade is positioned as a steepener, the position works against the manager temporarily.
This episode was covered in today’s The Market Signal — 2026-05-25, a cross-source synthesis of multiple podcast reports.