Episode summary
Why Rates Could Keep Rising
The Markets
· · Hosts: Chris Hussey · Guests: Phillip Lee
Summary
Phillip Lee argued that the rise in US Treasury yields is being driven by several forces at once: sticky inflation risks, resilient growth and risk assets, heavier fiscal issuance, and spillovers from higher rates in the UK and Japan. He said investors are asking for more real yield because they are less confident inflation is fully behind the Fed, while the market also has to absorb more duration risk and compensation for that risk.
On the Fed, Lee said the base case has shifted from cuts to an extended hold, and that the market has even moved to pricing in hikes into 2027. He suggested that if growth does not slow materially, policy may stay restrictive longer than many expected. He also emphasized that large deficits and ongoing supply do not imply default risk, but do justify a higher term premium.
Lee thinks higher mortgage rates around 6.5% are already cooling housing and may pressure the consumer through fading tax refunds, higher gas prices, and waning healthcare subsidies. His trade call is a steepener, especially 5s/30s, with the back end likely to rise more than the front end. For 60/40 investors, his message was patience: collect carry and wait for clearer macro signals rather than making heroic calls.
Key takeaways
- Phillip Lee says the main driver of higher Treasury yields is a mix of inflation risk, stronger growth, fiscal supply, and global spillover.
- Lee expects the Fed to stay on hold for a while, with the market now even pricing some hikes into 2027.
- Lee sees a growing fiscal premium from 6% to 8% deficits and heavy issuance, not a default scare but higher compensation for duration risk.
- Lee thinks 6.5% mortgage rates are already slowing housing and may weaken the consumer further.
- Lee’s preferred trade is a 5s/30s steepener, and his advice to 60/40 managers is to stay patient and clip carry.
Notable quotes
“I think there's a variety of different things that are happening in the markets”
“In addition, I would say that you've had a lot of resilience in risk assets and growth”
“I expect, and I think many do expect that the Fed will stay on hold for a bit”
“I think when you look at, again, not only the US, but the UK, Japan, a lot of these countries are running deficits, right? Six to eight percent deficits”
“I think it is a steepener. And I would say fives, thirties steepeners, and you could do that in linear form, i.e., in Treasuries, or you could do that in a vol conditional format”
How the episode opens
This is The Markets. I'm Chris Hussey, and today is Thursday, May 21st, and I'm here on the Goldman Sachs trading floor with Phil Lee, who's head of Real Money Rate Sales within Global Banking and Markets. Phil, thanks so much for joining us.
Thanks for having me. All right, I got to ask, what is real money rate sales? Yeah.
Real money is basically, if you want to keep it simple, is it's the non-hedge fund side of clients. So, we look after our banks, insurance, asset managers, for the most part. Okay, great.
That makes sense to me. Okay. Help us understand what s happening with rates, because rates have moved higher.
What s going on inside the markets? Yeah. So, rates, I wish there was a smoking gun answer for this.
I think there's a variety of different things that are happening in the markets. One, are inflation risks, so oil, tariffs, near-term AI cycles, are adding to some of that uncertainty and making investors less confident that inflation is going away from the Fed's mandate. So, I think that that's keeping the Fed cautious, and investors are asking for higher real yields.
In addition, I would say that you've had a lot of resilience in risk assets and growth. And so, we've seen equities do really well, we've seen other risk assets do really well, and so, that part of the narrative is really, it's really held up better than expected. And I think that if growth doesn't slow materially, rates have to stay restrictive a little bit longer.
You have to add in fiscal premium to that in terms of, you see that people need to be compensated for holding on to more longer-duration risk, and that compensation leads to higher rates, especially in the back end.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- treasury yields
- fed rate outlook
- bond market
- real money rate sales
Companies and tickers mentioned
- GS
- Goldman Sachs
Watch the episode
Watch “Why Rates Could Keep Rising” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from The Markets
The Markets, this episode and its artwork belong to Goldman Sachs. Octagon is not affiliated with the show; this page is an independent summary.
