GS Xholi USD Swaps Trade Idea Receive 10y10y rate the term premium leg has run ahead of fundamentals

GS Xholi - USD Swaps Trade Idea: Receive 10y10y rate: the term premium leg has run ahead of fundamentals 13 Oct 2026 Ilir Xholi · Goldman Sachs · FICC & Equities 13 Oct 2026

GS Swaps Trading desk commentary, 13-Oct-2026

Trade: Receive USD 10y forward 10y SOFR swap (10y10y) Reference level: 5.26% Target: 4.99%, the 50% retracement of the move from the 1-Jul low to the 7-Oct high Stop: 5.40%, representing a clean break above the 7-Oct high of 5.38%.

10y10y hit 5.38% on 7-Oct, its highest level since at least the start of 2024. It has risen 32bp in the past month and 56bp since the start of the year.

The latest leg looks different from the rest of the year. Between 22-Sep and 7-Oct, 10y10y rose 47bp while the 2y swap rate did not move (0.0bp) and 1y1y rose only 6bp. That move was not about the expected path of the Fed – it was the market demanding more compensation for holding long-dated rates risk (term premium). The 10-day rise into 7-Oct was +41bp, larger than 99.6% of 10-day moves since 2024. Since then, 10y10y has come back 9bp in two sessions.

Over the full year the picture is the opposite. The front end has done most of the work: 1y1y is up 166bp, 10y10y up 56bp. We believe that the recent jump in long-end term premium has gone too far relative to the fundamentals behind it.

Fundamental drivers of the selloff

| • | The Fed restarted hiking, with little guidance on what comes next: It raised rates 25bp to 3.75-4.00% at its September meeting, its first increase since July 2023. The minutes showed most officials see another hike as appropriate by year-end. But Chair Warsh described the move only as removing "a dose of accommodation", and the Fed has stopped signaling its next steps. Without forward guidance, the market has not yet worked out the reaction function of the Warsh Fed: how far it will go, and whether it will keep looking through energy-driven supply shocks. The long end has priced that uncertainty about the policy path as term premium. | | • | Energy-led inflation: The Middle East conflict has kept energy prices high: Brent was trading above $105 on 13-Oct, and diesel hit record prices in late September. University of Michigan inflation expectations also rose sharply in September. | | • | Fiscal deficits and bond supply: Concern over deficits, plus heavy debt issuance by AI-related companies, added to supply pressure. | | • | Global contagion: Long-end yields rose across markets. Japan's 10y JGB went above 3%, its highest since 1996. European yields rose too. The ECB hiked again in September, taking its deposit rate to 2.50% and warning that price pressures could prove persistent. Europe is also more exposed to energy prices: euro area inflation rose to 3.8%, its highest since September 2023, driven by fuel. The 10y Bund reached 3.65% in late September, a 17-year high. France added a fiscal and political premium on top. The 10y OAT went above 5% in early October, its highest in more than two decades, and the OAT-Bund spread widened to near 160bp, the widest since 2011. |

| • | Convexity hedging: As rates rose, mortgage prepayments slowed and mortgage duration extended. Hedging that extension (selling duration and paying fixed) added to the selloff and fed on itself. The 5y5y and 10y10y points are where the duration pain was felt greatest and where the mortgage partial durations hedging left the largest imprints. That helps explain why the long-end forward led the latest leg while the front end barely moved. | | • | Momentum and stretch: 10y10y is 2.8 standard deviations above its 200-day average, after peaking at 3.5 on 30-Sep. Its 14-day RSI peaked at 78.5 on 7-Oct and is now 65.6. Momentum is turning over. | | • | Auction demand has shifted: A weak 5y auction in late September fed the selloff. By contrast, the 7-Oct 10y auction stopped through by 1.7bp and the 30y was well received, which shows real buyers at these yields. |