GS Meschoulam Carry without Confirmation

GS Vitali Meschoulam - GS MarketStrats | Carry without Confirmation 18 Aug 2026 Vitali Meschoulam · Goldman Sachs · MarketStrats, FICC & Equities Tue 18 Aug 2026, 5:41am ET

Bottom line: The market wants to believe in carry, and for now it has been rewarded for doing so. But our framework says the regime is not yet fully confirmed. The current set-up is not a clean soft landing. It is a regime of softening growth, moderating inflation, robust risk appetite and still-restrictive real rates. That is ultimately an unstable mix unless real yields move lower. In our view, the next phase is likely to be resolved in one of two ways: 1/ Real rates fall toward where equities and carry assets think they should be, validating the rally; or 2/ Equities and carry assets reprice to a world in which real rates remain structurally higher than markets currently expect. The bond market appears to be pricing a higher equilibrium cost of capital than the equity market. For now, real rates remain the tie-breaker. At some point, one of them is likely to be proven right.

Markets increasingly want to embrace the carry narrative. Inflation is moderating (Jun/Jul CPI prints), growth data cooling at the margin, central banks are further away from tightening than feared, volatility is low (outside of rates), credit is firm, EM carry is working, and equities continue to grind higher.

But there is one important problem with that narrative: US 10Y real yields are still close to 2.50%.

That is not a trivial detail. In our framework, the level and direction of real rates remain central to understanding whether risk assets are being supported by improving fundamentals, easier financial conditions, or simply the expectation that easier financial conditions will arrive soon.

Right now, markets seem to be behaving as if real rates are already falling. They are not.

Markets are indeed anticipatory, but what is becoming clear is that the market is currently trading the destination and not the starting point.

The prevailing market narrative is straightforward: growth slows, inflation moderates, the Fed eventually eases and real yields move lower. In that environment, risk assets remain supported.

That is the soft-landing version of the story. It is also the version that most risk assets are currently pricing.

But the starting point matters. At close to 2.50%, 10Y real yields remain highly restrictive by post-GFC standards. That means the market is not being supported by already-easy discount rates. It is being supported by the expectation that restrictive real rates are temporary. That makes this less of a clean Goldilocks regime and more of a conditional carry regime.

Carry can work here, but it depends on the next move in real yields. If 10Y reals fall from around 2.50% toward 2.00%, the current cross-asset rally will continue. If they remain stuck around 2.40 to 2.60%, the

market is effectively trying to run a Goldilocks asset allocation on top of restrictive real discount rates. That is a much less stable equilibrium.

Recent US data have shown some signs of cooling in demand, most notably in consumption indicators, reinforcing the market's expectation that policy can eventually become less restrictive. The more important question, however, is not whether growth is slowing, but whether slowing growth is sufficient to pull real rates materially lower.

That gives us two very different paths.

1. Growth slows/real rates follow: Demand cools, inflation continues to moderate and the Fed is gradually validated in easing policy. Real yields fall, financial conditions loosen and the carry narrative extends. Equities, credit, EM carry and gold remain supported. This is effectively a regime in which bad news is good news.

2. Growth slows/real rates don't follow: The more problematic path is one where growth softens, but real rates do not fall enough. That could happen if inflation remains sticky, term premium remains elevated (issuance plays a role here), fiscal concerns keep the long end under pressure, or the Fed is unable or unwilling to validate the amount of easing priced by markets. In that world, growth is slowing but the economy does not receive the offsetting benefit of lower…