On Rising Fed Cut Bets, Goldman Lowers Treasury Yield Forecasts

Goldman Sachs Group Inc. has adjusted its outlook for U.S. Treasury yields, citing a greater possibility that the Federal Reserve will begin cutting interest rates sooner than initially projected. In a report published on July 3, a team of strategists led by George Cole revised their year-end predictions for the two-year and 10-year Treasury yields to 3.45% and 4.20%, respectively.

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These new forecasts represent a significant shift from Goldman’s previous expectations of 3.85% for the two-year and 4.50% for the 10-year yield. The bank also lowered its yield projections across other key maturities, signaling a broader shift in its view of the rate environment.

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This change in perspective followed a recent update from Goldman’s economic team, which now expects the Fed to implement three rate cuts this year—one each in September, October, and December. Previously, the firm had anticipated just a single cut near year-end.

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The economists made this call even before Thursday’s release of strong headline job figures, which somewhat eased pressure on the Fed to act immediately. However, Goldman’s interest-rate strategists remained firm in their revised forecast, arguing that the job data wasn’t as robust as it appeared at first glance.

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They highlighted that much of the job growth came from government hiring, and that the labor force participation rate had edged slightly lower, indicating some underlying softness in the labor market.

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Forecasting Treasury yields has become an increasingly complex endeavor for Wall Street analysts, who must now account for a wide range of competing factors. On one hand, potential inflationary pressure from new tariffs could drive yields higher.

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On the other, the economic impact of these tariffs—particularly if they erode household purchasing power—could slow spending and overall economic growth, putting downward pressure on yields. These uncertainties are being further amplified by fiscal developments, including a $3.4 trillion spending plan that President Donald Trump is expected to sign later on Friday. That package includes tax cuts, raising concerns about a widening budget deficit and the need for increased government borrowing.

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In this context, Goldman’s updated outlook leans more dovish than broader market expectations. According to Bloomberg data, the average forecast from other strategists sees the 10-year yield ending the fourth quarter at around 4.29%.

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As of Thursday, the yield was sitting at 4.35% before financial markets closed for a public holiday. Meanwhile, overnight-indexed swaps are indicating a greater than 70% chance that the Fed will begin cutting rates by September, with at least one more rate cut expected by the end of the year.

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Goldman’s strategists believe that a gradual and non-disruptive path toward lower short-term rates could help reduce additional risk premiums tied to fiscal uncertainty. This in turn could make U.S. Treasuries more attractive to investors.

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“A benign path to lower short-term rates can dilute a potential source of additional fiscal risk premia and improve the economic appeal” of Treasuries, they wrote in their note. They also noted that there is room for the Fed to deliver more rate cuts than previously assumed, which would further support the case for lower Treasury yields across the curve.

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Their analysis reflects a broader sentiment shift among investors and analysts who are increasingly focused on the interplay between monetary and fiscal policy. With inflation pressures appearing more contained and economic growth prospects softening, the Fed may have greater flexibility to reduce rates without risking a spike in inflation. This policy shift could help stabilize financial markets, support borrowing, and encourage spending—especially if fiscal stimulus begins to flow into the economy.

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In summary, Goldman Sachs’ new forecast suggests that Treasury yields will fall more sharply than previously expected, as the Fed embarks on a more aggressive rate-cutting path. This outlook is based on both economic data and evolving fiscal conditions, and it places Goldman slightly ahead of the broader market in anticipating a more accommodative monetary policy stance in the months to come.

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