The Opportunities for Investors amid Higher-for-Longer…

PodcastGoldman Sachs The MarketsAnshul SehgalSep 18

The guest identifies the Middle Eastern conflict, tariffs, and rising energy costs as constraints on monetary policy, while saying the Fed committee has converged on two rate hikes this year. He also discusses U.S. debt dynamics and the pressures of rising long-end bond supply, alongside a more leveraged equity market shaped in part by AI-related investment. He favors compute, neo-clouds, and data centers over long bonds, and does not expect long-end rates to fall to 3%.

Interest Rates Monetary Policy Government Debt AI Infrastructure Technology Stocks Geopolitical Risk

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Key Takeaways

The guest calls the Middle Eastern conflict a key variable for monetary policy and markets, while arguing that tariffs and rising fuel and energy costs constrain central banks’ ability to underwrite inflation. Separately, he says the Fed committee converged on two hikes this year, with one delivered and another likely in October or December.

The guest argues that higher government debt-servicing costs accrue to capital rather than labor, so Fed hikes in this setting could curb labor spending and weaken long-term consumption prospects. He also says debt-to-GDP worsened by 1% to 1.5% annually over the past four years even as nominal GDP grew about 6%, making long-run sustainability concerns less credible to him—though he acknowledges the pattern may not continue.

The U.S. long bond had traded around 5%, its highest yield in more than two decades, and the guest says the Fed chair left policing that yield to the market. He attributes long-end crowding to reduced pension demand as baby boomers retire and added AI-related issuance, and sees a case for reducing Treasury long-end issuance but not expressly to rein in yields.

GEO-POLITICS

Conflict And Markets — The guest says the Middle Eastern conflict is the key variable shaping monetary policy and equity and fixed-income markets. He argues that tariffs and rising fuel and energy costs—including costs rising outside the war—limit central banks’ ability to underwrite the resulting inflation.

“I think handicapping the war because if you if you take a step back, what we've learned from global central banks is that between, certainly, the Fed, between tariffs, fuel…”—

ECONOMY

Fed Rate Consensus — The guest says the Fed committee converged on two rate hikes for the year. One has already been delivered, and another is likely in October or December. This was new information for a market that had expected more disagreement among committee members.

“The entirety of the committee coalesced around having two hikes this year. One of them we got yesterday and likely another one either in October or December…”—

Debt And Labor — The guest argues that higher U.S. government debt-servicing costs accrue to capital rather than labor, so Fed hikes in this setting could curtail labor spending. He says that would weaken the U.S. economy’s long-term consumption prospects.

“What has changed on this side of the pandemic is interest expense or debt servicing costs for the US government. But that does not accrue to labor…”—

MARKETS

Long Bond Yields — The guest says the U.S. long bond traded around 5% for several weeks, its highest yield in more than two decades. He says the Fed chair did not believe he had to police the long bond, leaving that to the market.

“So the long bond, as you know, has traded about 5% for a few weeks now. It's the highest yield the long bonds had in over two decades.”—

Long-End Supply — The guest says retiring baby boomers have reduced demand for long bonds from pension savings, while AI-related issuance adds long-dated supply, creating crowding at the long end. He sees a case for reducing Treasury long-end issuance under these conditions, but is less persuaded that the goal should be to rein in long-term yields.

“As the boomers are retiring, the demand for the long bonds not as high from their pension savings…”—

FORECASTS

Compute Over Bonds — The guest favors being long compute, neo-clouds, and data centers over long bonds. He argues that these more-levered equity exposures could rise multiplicatively, while the potential gain on an unleveraged long-bond position is more limited.

“To me, it's being long compute, being long neo clouds, being long data centers…”—

Fed Rate-Hike Outlook

The guest says Fed officials converged on two hikes this year, describing them as a withdrawal of accommodation while weighing inflation against the risk of curbing consumption.

Treasury Supply And Debt

The guest discusses high long-bond yields, demographic and AI-related issuance pressures, and argues that near-term debt-sustainability fears are amplified by market bandwagon effects.

Equity Leverage And AI

The guest says equities are more leveraged but favors parts of the market tied to compute, while noting tighter policy could weaken broader consumption and equity prospects.

Compute Trade And Conflict Risks

The guest prefers compute, neo-clouds, and data centers to long bonds, does not expect long rates to fall to 3%, and identifies the Middle Eastern conflict, tariffs, and energy costs as key policy risks.