Goldman Sachs: U.S. Yields Caught In Global Downdraft

Goldman Sachs note that “from a mid-week high of ~3%, 10-Year Treasury yields declined nearly 25bp in the latter part of last week. Survey-based data in the U.S. have been weak, more so than hard data. While we expect a substantial slowdown in H222, our economists believe current activity indicators could be overstating the deceleration in the economy. Indeed, rather than driven by domestic concerns, our spillover model suggests that the decline in Treasury yields in largely the result of a bullish bond impulse originating in Europe, likely driven by the heightened concerns about imminent recession in that region. While we would normally expect front end hike pricing to be somewhat insulated from such spillovers, this has also come off in the process; the terminal rate pricing in the U.S. has declined by about 25bp. At the upcoming FOMC meeting, we expect the Fed will likely hike 75bp, in line with market expectations. The more interesting information at the meeting could be on the magnitude of the rate hike in September. Our economists expect the Fed will avoid strong guidance on this matter next week, and maintain their baseline for a downshift in pace at that meeting. Broad-based domestic inflation poses upside risk to this expected deceleration in the pace of rate hikes. To be sure, growth deceleration in the U.S., combined with sharp deterioration in incoming European data could continue to weigh on yields in the near term, but we believe domestic price data will be an offset, and that the cuts priced through early next year are unlikely to be realized.”