Goldman Sachs Warns Against Complacency in Credit Markets

Goldman Sachs Group Inc.’s credit strategists are urging clients to hedge risks as global corporate bond yield premiums have narrowed to their lowest levels since 2007 this week. The warning comes as investors appear relatively comfortable with the outlook for economic growth.

In a report dated July 31, Goldman strategists led by Lotfi Karoui wrote that recent trade agreements struck by the U.S. with its trade partners have provided clarity on tariffs, and that investors are willing to look past recent growth weakness “as long as recession risks remain contained.”

However, they cautioned against slipping into a state of complacency, noting that a number of potential downside risks remain. According to one index, global investment-grade bond yield premiums narrowed to 79 basis points on Thursday, the lowest level since July 2007 – on the eve of the global financial crisis.

Despite the significant compression in credit spreads and the S&P 500 index hitting new all-time highs this week, Federal Reserve policy makers have avoided signaling imminent interest rate cuts, suggesting the Fed still needs more data to determine that inflation risks won't be persistent.

Potential Downside Risks

“There are enough sources of downside risk to justify keeping some hedges in portfolios,” the strategists wrote. “Growth could surprise further to the downside,” disinflationary pressures could fade, or a fresh bout of concerns about Fed independence could trigger a sharp sell-off in long-dated yields.

The report mentions that Goldman’s economists still expect the Fed to cut interest rates by 25 basis points in September, October, and December, followed by two more cuts in 2026. The Fed also lowered its view for U.S. growth this week, citing that economic activity is slowing.

“Arguably, trade policy has become much more predictable than it was in March and April, which has allowed the market to materially reduce the pricing of recession risk,” they added. “While the role of tariff-related headlines as a primary driver of risk sentiment has diminished, its impact will become increasingly important through differentiation within industries as investors begin to digest the disparate impacts across entire supply chains.”