Goldman Sachs: US Treasury selloff may be overdone, five factors cited

Attention should focus on the oil connection. According to Goldman, the energy shock affects US Treasuries indirectly. Forced selling in UK and euro-area bonds is the transmission mechanism. This means headlines about Gulf supply now influence both crude and bond markets. With Brent near $100, that pressure will likely persist unless there is de-escalation or a clear improvement in Middle East flows. Higher Treasury yields simultaneously tighten financial conditions for equities, credit and housing — the adjustment Goldman believes the market is seeking. For investors, the bank's call is conditional: yields may seem attractive, but the trigger for a rally must come from energy or growth, not from valuation by itself.

Goldman Sachs believes the selloff in Treasuries has been excessive, but it is not yet prepared to declare a reversal until oil prices or US economic data shift.

A summary of Goldman's key points follows:

• Goldman Sachs asserts that the recent sharp increase in US rates may be somewhat excessive given the magnitude of the move.
• The bank points to five factors: still-loose financial conditions, oil-linked selling in UK and euro-area bonds, robust US data, weak Treasury auctions, and technical portfolio flows.
• A five-year Treasury auction held on 23 September cleared at just over 5%, marking the highest auction yield for that maturity since June 2006.
• Corporate bond issuance related to AI investment has worsened the supply imbalance, according to Goldman.
• Goldman says that for Treasuries to rally, either a decline in energy prices or a reversal in strong growth data may be required.

In a fixed income note, Goldman Sachs said the recent surge in US interest rates may have exceeded what fundamentals warrant, but cautioned that a substantial rally in Treasuries may hinge on lower energy prices or a shift in the string of strong US economic data.

Goldman identified five factors driving the accelerating selloff. The first is financial conditions, which the bank views as still relatively loose. It sees rates trapped in a feedback loop: when equities and credit rise or stay stable, yields are forced higher to provide the tightening that risk assets are not delivering.

The second factor is geopolitical. Higher oil prices have lifted yields in energy-sensitive economies like the UK and the euro area, where bond buying was a popular trade. As yields rose, some positions were liquidated via stop-outs — automatic exits when losses reach a predetermined level — and the selling spread to US Treasuries, despite the US being less vulnerable to energy prices.

The third factor is strong data, with a solid S&P Global purchasing managers' index and persistently low jobless claims reinforcing a firm economic trend. The fourth is supply. Treasury auctions on 23 September saw weak demand, as the five-year note cleared at just over 5%, the highest yield for a five-year auction since June 2006. Heavy corporate borrowing to fund AI investment has added to the supply imbalance, according to Goldman. Finally, technical flows — including portfolio rebalancing that forces some investors to sell — have added pressure, while volatility has kept potential buyers hesitant.

Goldman's judgment is that the move may be somewhat overdone relative to its magnitude. But the bank acknowledged that the trigger for a reversal will probably come from outside the bond market, via either lower energy prices or weaker growth data.

This leaves Treasuries tightly linked to the oil market. With Brent near $100 a barrel due to Middle East supply disruption and the Federal Reserve having raised rates in September, the conditions Goldman sees for a rally are not yet present. Until one of these changes, attractive yields by themselves may not be sufficient to bring buyers back in force.