Synopsis:

Goldman Sachs discusses the outlook for US interest rates, indicating that while there is significant downside risk incorporated into the front-end of the yield curve, 10-year yields are expected to stabilize above current levels. The firm highlights the potential for downside asymmetry due to softer data but maintains a baseline forecast where 10-year Treasury yields center above 4%.

Key Points:

1. Current Market Conditions:

   • Front-End Yields: The market has priced in significant downside risk relative to Goldman Sachs' expected Fed path.
   • 10-Year Yields: These are about 30 basis points below Goldman Sachs' year-end forecasts.

2. Downside Asymmetry:

   • Soft Data: Given recent softer economic data, there is logic in embedding some downside asymmetry in the yield curve.
   • Fed Support: The Federal Reserve is likely to quickly support the economy if necessary, providing a buffer against significant downside moves.

3. Limits to Front-Loading:

   • Justification: There are limits to how much downside front-loading can be justified without real concern that something is fundamentally breaking in the economy or markets.
   • Acute Deterioration: Currently, there is no broad-based evidence of acute deterioration in either the labor market or market function.

4. Risk Scenarios:

   • Meaningful Rally: A significant rally in yields would likely require evidence of substantial risks materializing, such as a marked deterioration in the labor market or market function.
   • Benign Outcomes: In more benign scenarios, the center of gravity for yields is expected to be above current levels across the curve.

5. Baseline Outlook:

   • Fed Forecast and Recession Risk: Despite adjustments to the Fed forecast and recession risk assessment, Goldman Sachs' baseline outlook suggests that 10-year Treasury yields will be centered above 4%.

Conclusion:

Goldman Sachs anticipates that while there is room for downside asymmetry in the near term due to softer economic data, the lack of broad-based evidence of acute economic deterioration limits the potential for a substantial rally in yields. The firm's baseline scenario remains centered on 10-year Treasury yields stabilizing above 4%, reflecting a relatively higher center of gravity across the yield curve under more benign economic outcomes.