Goldman: From Recession Concerns To ‘Higher For Longer’

Goldman Sachs not that “in a space of two months, markets appear to have moved from worrying about recession to concerns about too strong an economy - the change in option-implied distributions 10y US yields suggest as much.”

• “Investors had already been pricing out policy easing in the near term, but more recently have begun to focus on medium-to long-term rates as well.”
• “Can current levels of longer term interest rates be sustained? We’ve noted on several occasions in the past that we believe this to be the case, largely because we believe there has been a structural shift higher in the equilibrium level of rates that the economy can tolerate.”
• “However, the recent upward repricing comes with some caveats. Early shifts in positioning data suggest that real money investors may find current real yield levels sufficiently attractive and are likely to add duration.”
• “We believe these early trends could extend post-Labor day. That is, although we think current yield levels could be sustainable, a combination of softening data and real money demand could lead to some near-term reversals, or at the very least, cap a further sell-off in longer maturity bonds.”