Rich Privorotsky, head of trading at Goldman Sachs' Delta-one desk, believes that current interest rate pressures are increasingly resembling a bond supply issue.
Recent US data has weakened, causing short-term interest rates to fall, but long-term rates remain under pressure because the market needs to absorb a massive sovereign deficit and potentially over $1 trillion in annual AI capital expenditures, the latter increasingly financed through the debt market.
His assessment is that the market needs higher real interest rates to absorb such a large bond supply. This also means that even if economic data continues to slow, long-term yields may not decline in tandem, and the yield curve may continue to show a divergence: short-term yields driven by data and central banks, while long-term yields are constrained by fiscal and financing supply.
Privorotsky even proposes a more extreme scenario: if long-term yields continue to lose their anchor, the Federal Reserve may need to maintain tightening even with weak economic data to flatten the curve and stabilize long-term interest rate expectations. For the market, the biggest medium-term risk variable remains long-term interest rates, rather than expectations of a single rate cut.
