Long-Term Rates Quietly Break Through, This Time the Fed May Be Powerless

Goldman Sachs traders believe that the rise in long-term rates is increasingly a supply issue rather than a central bank discipline issue—massive sovereign deficits combined with annual AI capital expenditures potentially exceeding $1 trillion are leading to an overwhelming amount of "paper" that the market needs to absorb.

Written by: Bu Shuqing, Wall Street Insights

The yield on U.S. long-term government bonds is quietly approaching a critical technical threshold, and this time the driving force may not be improper monetary policy, but rather structural supply excess—the dual expansion of sovereign debt and AI capital expenditures is creating unprecedented pressure in the bond market.

The yield on the 10-year U.S. Treasury is threatening to break through the important resistance level of 4.8%, while the 30-year yield has already broken through the long-term technical pressure zone.

Rich Privorotsky, head of Goldman Sachs' Delta-one trading desk, has made a cautionary judgment: the rise in long-term rates is increasingly a supply issue rather than a central bank discipline issue—massive sovereign deficits combined with annual AI capital expenditures potentially exceeding $1 trillion are leading to an overwhelming amount of "paper" that the market needs to absorb.

Currently, interest rate volatility remains relatively controlled, and the stock market has not yet fully reacted to the rise in rates. However, analysts warn that once interest rate volatility truly surges, the adjustment in the stock market could far exceed current market pricing. Meanwhile, the implied volatility of S&P 500 options remains at its lowest level since January, and the cost of hedging is relatively low; this window may not last long.

Long-Term Yields Approaching Critical Breakthrough

From a technical perspective, the yield on the 10-year U.S. Treasury is at a critical juncture. If it closes above 4.8%, the market may face a genuine short squeeze.

According to The Market Ear analysis, the market has formed a complex psychological structure after a long period of range-bound trading, and once a significant breakthrough occurs after such a lengthy consolidation, it often creates a "vacuum zone," significantly increasing the risk of accelerated price movement.

The trend of the 30-year U.S. Treasury is even more direct.

Long-term charts show that the 30-year yield has broken through multiple important long-term resistance levels. The Market Ear points out that this is not a game for short-term traders, but if this breakthrough is confirmed and sustained, the subsequent trend could be "quite ugly."

The Dual Assault of AI Debt Waves and Sovereign Deficits

Privorotsky's core argument is that the root cause of this rise in long-term rates is structural imbalance on the supply side, rather than a repricing of the market's expectations regarding the Fed's policy stance.

On the data front, the issuance of AI-related debt has exploded. According to Goldman Sachs data, since the beginning of this year, AI-related companies have raised approximately $489 billion in the global investment-grade, high-yield, and leveraged loan markets, far exceeding the total of $322 billion for the entire year of 2025. More broadly, the issuance of U.S. investment-grade bonds has surpassed $1.5 trillion this year, and it is expected to exceed historical records set during the pandemic in 2026.

At the same time, sovereign deficits remain high.

Privorotsky points out that while economic data has softened and short-term rates have correspondingly outperformed, hard constraints still exist: massive sovereign deficits and potential annual AI capital expenditures exceeding $1 trillion together create sustained supply pressure in the bond market. Against this backdrop, even if economic data weakens, the Fed may be forced to raise rates in a weak data environment to re-anchor long-term rates and flatten the yield curve.

Valuation Pressure: Can Tech Stocks' "Immunity" Last?

Despite the 10-year U.S. Treasury yield rising from below 4% since the end of February to its current level, tech stocks have shown an unusual resilience, with the divergence between the Nasdaq 100 index and the 10-year yield widening to a significant extent.

Privorotsky believes that this divergence will ultimately be corrected through a compression of valuation multiples.

His logic is that if the market requires the public or private sector to cut spending, the adjustments are more likely to fall on the private sector, as governments rarely choose fiscal tightening voluntarily. Higher real rates, combined with the massive demand from the public sector and AI capital, mean that there will be some degree of "crowding out" in other areas. This effect may already be reflected in the broader market's downgrading—stock performance has begun to lag behind the upward revisions in earnings per share.

Goldman Sachs data also shows that when the 10-year yield rises by more than 2 standard deviations, it often has a significant drag on the stock market.

The Real Risk Trigger

The Market Ear emphasizes that for the stock market, the speed of interest rate changes is more critical than the direction itself, at least in the short to medium term. Currently, the divergence between the MOVE index (which measures interest rate volatility) and the S&P 500 is quite pronounced, but interest rate volatility has not yet seen a true surge.

Analysts suggest closely monitoring the trends in interest rate volatility—once this indicator breaks through, it will be an important signal for the repricing of stock market risks.

Currently, the implied volatility of S&P 500 options is at its lowest level since January, and the cost of hedging stock risks through options remains relatively low. The Market Ear advises investors to make good use of this window.