"Immense" AI Narrative-Shift Leaves Goldman's Rates Traders Looking For Hedges

The short term macro outlook remains relatively benign; that’s not changed this year despite the growing AI displacement theme.

Goldman Sachs rates traders believe that growth should continue to be supported by well flagged tailwinds through H1 from fiscal, easy FCIs, AI capex and fading tariff effects.

There were some signs of the consumer softening through Q4, but those are now being offset by stronger timelier spending indicators like credit card data and should be further boosted as tax refunds land.

Labor market concerns have also calmed vs 3 months ago...

While the risks to the labor market remain skewed to the downside, the trend has stabilized and our estimate for trend labor market growth stands at 70k, in line with the breakeven rate for the first time since 2025Q2.

Meanwhile the inflation profile continues to normalize and the profile for OER and lower goods prices gives conviction that this momentum will remain in place as tariff effects come out over the course of the year. 

While the spot macro data has done nothing to change this benign outlook, the market narrative has been driven by AI disruption and the potential forward implications to labour and inflation.

This interplay between the spot and forward outlook has been key and it is the latter which is winning.

A good example of this has been the sharp sell off in software, despite spot earnings remaining robust...

While the first phase of the AI theme was focused on value creation and rewarding those companies that invested more, the second phase as adoption has sped up quicker than expected has been of AI destruction.

Despite history showing that technological revolutions might destroy some jobs, they are often offset by new jobs created – the timing of when those new jobs are created is unclear, particularly if adoption continues to outpace expectations. Taking a step back, the speed with which the narrative around AI has shifted over the last year has been immense.

We are at the beginning of the biggest technological change since the internet; plotting the forward a year out from now is hard and distributions for rates markets are wide given the possible impact on inflation, labour and neutral rates (and the timing at which each is impacted). With that in mind we remain low conviction on USD rates.

The short term growth outlook suggests rates are rich, but the forward implications for inflation could provide an offset. 

With vol still relatively low, finding places to hedge some of the wings in rates make sense to us.

For now the growth outlook feels better expressed in equities, with the continued sectoral moves reinforcing the necessity for breadth.

IN SUMMARY...

The rates market is struggling to price the near term positive growth backdrop when the forward picture is so muddy, and distributions remain so wide around what AI means for neutral rates, productivity and the labor market.

For now the growth outlook feels better expressed in equities, with the continued sectoral moves reinforcing the necessity for breadth.

Rates can offer hedges against this... US rate vol has starting to creep higher.. but AI is a global theme.

Are there better places to express this hedge? 

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