Fed Hikes Spark Volatility as Goldman Sachs Sees Asymmetric Trades in Compute and Data Centers

Goldman Sachs' Anshul Sehgal recently discussed the current state of interest rates and their impact on investors. With the Federal Reserve coalescing around two more hikes in 2026, one already delivered and a second expected in October or December, markets had positioned for more dispersion based on individual committee members' prior speeches.

However, this dispersion did not materialize, leading to volatility. Sehgal argues that the market and the Fed are telling two different stories about the same decision. The market believes the Fed is reacting to a single CPI print, while the Fed believes it is catching up after five years of missing its inflation target.

Sehgal stresses the importance of understanding the distinction between primary deficits and interest expense. Primary deficits track roughly the same rate as in 2015 or 2017, but interest expense has increased, accruing to capital and the top decile of wage earners rather than labor. This means hiking into this dynamic curtails labor spending and long-term U.S. consumption prospects.

Sehgal also discusses the long bond, which has traded around 5% for a few weeks, with macro markets worried about the long end becoming unhinged. He believes that reducing long-end issuance makes sense due to structural changes in demographics and AI-related issuance, but doing it expressly to rein in the long end does not, as it creates bandwagon effects in behavioral finance.

Regarding debt sustainability, Sehgal considers it a red herring. Every October, warnings appear about expanding debt-to-GDP ratios by 6% to 7%, but nominal GDP has grown by about 6% over the last four years, resulting in only a 1% to 1.5% worsening of debt-to-GDP.

Sehgal's trade expression is to be long compute and data centers rather than the long bond. He believes that long-term borrowing costs being in check is a net positive for the equity complex, but the equity complex is more levered today than a year ago.