Goldman Sachs has made a significant revision to its US Treasury yield forecasts, lowering expectations on the 2-year and 10-year Treasury yields. 

In a July 3 report, Goldman’s strategists, including George Cole, projected that the 2-year yield would finish 2025 at 3.45%, and the 10-year yield at 4.20%, down from their previous forecast of 3.85% and 4.50%, respectively. This shift is tied to their updated outlook on the Federal Reserve’s actions and an increased probability of rate cuts sooner than previously anticipated.

The Lead Brokers at Logirium, explains, “Goldman’s revised forecast signals a shift in expectations for the US economy and market conditions, particularly in light of the Fed’s likely response to economic pressures.”

Revised Expectations for Fed Rate Cuts

Goldman Sachs’ updated forecast came after its economists adjusted their Federal Reserve rate cut expectations for 2025. Originally, the firm anticipated only one rate cut in December. However, it now expects cuts in September, October, and December. 

This revision suggests that the Federal Reserve may take a more aggressive stance to stimulate the economy, despite strong job numbers earlier in the week. Goldman’s strategists pointed out that while the jobs report appeared strong, it was significantly influenced by government hiring, with a minor dip in the labor participation rate.

As a result, the bank believes the Fed will act to counteract any lingering economic uncertainty and possible slowdowns, particularly with concerns surrounding tariffs and fiscal policy. Goldman is forecasting that this shift in monetary policy will drive yields lower, and will have important implications for investors in Treasury securities.

The Impact of Tariffs on Economic Growth

Goldman Sachs has revised its interest rate forecasts, but US Treasury yields are still influenced by external factors, particularly trade policies. The firm highlights the difficulty in predicting yields due to the dual pressures of inflation from tariffs and potential impacts on consumer spending and economic growth. 

With President Trump’s fiscal package, including tax cuts and increased government borrowing, uncertainty in the Treasury market rises. Goldman suggests that while higher borrowing could push yields up, aggressive Fed rate cuts might keep yields lower, stabilizing US government debt and reducing some of the risks tied to fiscal pressure.

US Treasury Yields: A Broader Market Perspective

Goldman’s revision of its Treasury yield forecasts also highlights a divergence between its outlook and the broader market. According to Bloomberg’s strategist consensus, the 10-year Treasury yield is expected to reach 4.29% by the fourth quarter, slightly higher than Goldman’s more dovish forecast of 4.20%. As of the latest data, the 10-year yield stood at 4.35%.

The Cboe interest rate swaps market signals that there is more than a 70% chance of the Fed cutting the policy rate by September, with another reduction before year-end. These shifts in expectations reflect the market’s concern over economic growth and potential weaknesses in consumer spending, driven by the tariff-induced inflation and tightening fiscal policies.

The Broader Economic Picture: What’s Ahead?

In addition to shifting interest rate expectations, the outlook for US economic growth is becoming more cautious. With trade tensions and increased tariffs looming over the market, Goldman Sachs and other analysts are adjusting their growth projections. 

As tariffs continue to place pressure on consumer spending, there is a growing concern that economic momentum could slow.

Despite the recent uptick in job growth, Goldman Sachs and others are mindful that the labor market remains fragile and vulnerable to external shocks. The government’s fiscal package, although providing short-term stimulus, could ultimately lead to greater budget deficits and exacerbate debt levels, complicating efforts to stabilize long-term economic conditions.

A Strong Case for Treasuries Amid Fed Cuts

Goldman Sachs’ strategists argue that the lower yields they are forecasting for Treasury bonds make them more attractive to investors, especially if the Fed implements its anticipated rate cuts. The firm believes that lower short-term rates could offset some of the risk of increased government borrowing, making US government debt a more appealing option for investors seeking safety.

However, this dynamic is fluid, and it will depend largely on how the Fed manages interest rates and how global trade conditions evolve. If trade uncertainties persist, the resulting pressures on consumer spending and corporate profitability could lead to further rate cuts, which would ultimately support Treasury yields in the short term.

Conclusion: Navigating the Shifting Yield Curve

Goldman Sachs’ revised Treasury yield forecast signals a shift in expectations for US interest rates and economic risks. The firm anticipates aggressive Fed rate cuts, which could help keep yields lower. However, global trade uncertainties and the effects of US fiscal policies will continue to complicate the outlook. 

For investors, it’s essential to monitor Fed decisions, inflation, and trade developments, as these factors will influence Treasury yields. With yields expected to remain lower, Treasuries could become more attractive, providing stability in a volatile market.