Global Rates Trader Paradigm Lost

Economics Research 31 July 2026 | 9:55PM BST

July’s FOMC decision and subsequent press conference upended the rates market’s George Cole | initial read on the Warsh Fed. The hints towards higher yields doing the work in Goldman Sachs International tightening policy and framing of the decision introduce greater risk of long-end William Marshall instability in the near term. The path for the data still very much matters—upside | surprises can lead to further bearish pressure, but softer labor market or inflation Goldman Sachs & Co. LLC news should curtail upward pressure on US yields. We favor steepening the US curve Simon Freycenet | cross market versus Europe and expect the curve to retain more risk premia for a less Goldman Sachs Bank Europe SE - Paris certain Fed approach, but ultimately think that generalized bear steepening will be a Branch challenging dynamic to sustain. Energy price movements will continue to dictate the Isabella Rosenberg direction for European rates in the short run, but we think the recent positive | relationship between inflation risks and ERZ6Z7 slope will depend on a subdued ECB Goldman Sachs & Co. LLC

response to near-term inflation. With EUR 1y1y yields now stickier given elevated Friedrich Schaper | energy prices, we think 2y2y yields are too high on the curve, in either inflation relief Goldman Sachs & Co. LLC or escalation scenarios. A relatively dovish BoE and ongoing disinflation supports a Loic Mathys steeper GBP curve, but energy prices remain the key risk. FX intervention is only | likely to help stabilize long-end inflationary risks in JGBs if complemented by an Goldman Sachs International

acceleration of hikes—we think this is not yet likely, suggesting ongoing volatility for the belly and long-end.

United States and Canada n Risks reverse. July’s FOMC decision and Chair Warsh’s press conference steepened the real rate curve and drove inflation risk higher across the breakeven curve, the mirror image of the June meeting (Exhibit 1). By suggesting that the Fed has “stepped back in part from trying to influence” market rates and hinting that the move in yields could substitute for a rate hike, Chair Warsh left the market with a muddier read on the Fed’s reaction function and injected uncertainty about what part of the curve should be most responsive to incoming news. We have pointed to the 2023 experience previously, which saw the long-end serve as more of a pressure release valve and forwards trade as much as 100bp north of fair value (though the repricing then was about “higher for longer” and taking out cuts). In the near term we expect the curve to be less counter-directional to front-end rates (Exhibit 2), with long-end yields more exposed to hot data and increased risk that forward points diverge from fundamental anchors. By the same token, however, cooler inflation and/or labor

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market news can quiet concerns that the Fed is running greater risk with its policy rate approach and help to restore duration risk appetite (with our real money positioning measure having shown a steady drift from neutral to modestly underweight through the sell-off). Further, while the Chair’s reaction function was left ambiguous, we expect the broader Committee to respond in the event of higher inflation. The lack of information regarding how close the decision was or what it would take for the FOMC to hike increases the potential role of Fedspeak and the mid-August release of the minutes as market stabilizers. We continue to think our economists’ baseline for the Fed to remain on hold would justify additional steepening, and we expect the curve to retain more risk premia for a less certain Fed approach—we think cross market expressions are a sensible implementation and favor 2s5s SOFR steepeners versus OIS flatteners in Europe (entry: -7bp; target: +10bp; stop: -15bp). We view generalized bear steepening as…