Markets have quietly unwound the jump in the “US risk premium” that rattled investors in the spring, and Goldman Sachs thinks that newfound calm may be lulling them into a false sense of security.
The bank argues that political and structural worries in the US have faded so far, and so fast, that even a relatively small shock could now have an outsized market impact.
That premium, Goldman’s measure of how much extra return investors demand when Washington looks unstable, surged after April’s reciprocal tariff announcement and again when speculation grew about Jay Powell’s future as Federal Reserve chair.
Both episodes saw an unusual mix of falling US equities, a weaker dollar and rising Treasury yields, a pattern more typical of political nerves than economic stress. Since late July, however, the model shows a steady retreat.
Markets appear convinced those structural risks will not re-emerge.
Goldman captures this through a three-shock model that separates market moves into growth, monetary policy and a third bucket that picks up anything resembling political or institutional unease.
It is in that third category that April’s spike was sharpest, with the dollar sliding alongside bonds and equities.
By autumn, the US bond term premium had compressed and volatility across currencies and interest rates had drifted lower, all pointing to a market far more relaxed about America’s fiscal and institutional backdrop.
The worry, the bank says, is that this complacency leaves markets more exposed. The Fed chair appointment, expected in December or January, could be one trigger.
Governor Miran’s recent preference for hefty 50bp cuts has already hinted at what a more administration-aligned Federal Reserve might look like.
A wider split inside the rate-setting committee would revive questions about central bank independence.
Fiscal uncertainty could also creep back in if tariff policy bumps into court challenges or if tax rebates gather political traction. Neither of these is Goldman’s base case, but both sit dormant rather than resolved.
The playbook from earlier this year offers guidance. When those worries peaked, the dollar weakened, gold rallied, long-dated Treasury yields rose and the curve steepened.
US equities underperformed their peers, with Europe and Japan only partly caught in the crossfire. These were classic reactions to political rather than economic concerns.
If none of the risks resurface, the remaining premium could vanish entirely, nudging front-end yields higher and lending the dollar some support.
For now, though, Goldman notes that volatility across FX and rates markets sits at subdued levels. In that environment, paying for protection against the return of US structural worries looks relatively inexpensive.
For investors, the question is whether the quiet of late summer and early autumn reflects genuine calm or merely marks the pause before the next jolt.