Goldman says extra U.S. risk priced in earlier this year has now disappeared

Investing.com -- The extra U.S. risk premium that briefly gripped markets earlier this year has now faded, strategists say, as investors dial back concerns over structural issues ranging from fiscal sustainability to central bank independence.

The period of elevated worry, which began in early April, has steadily unwound since late July, leaving markets more relaxed but also more exposed should those fears return, Goldman Sachs strategist Vickie Chang said in a note.

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Chang traces the shift to a model that isolates moves in the market’s assessment of a “U.S. risk premium.”

She notes the market “sharply increased its estimation of the ‘U.S. risk premium’ in U.S. assets in early April,” driven by anxiety over reciprocal tariffs, budget dynamics and speculation about the potential removal of the Federal Reserve chair.

But that move has since reversed, with Chang noting a “continued compression of that increased ‘U.S. risk premium’.”

A similar pattern has played out in the U.S. bond market. The term premium rose sharply earlier in the year but has since fallen back, reinforcing the idea that markets have “significantly relaxed about U.S. structural risks,” Goldman’s note states.

The earlier episodes were unusual in that the U.S. dollar weakened alongside declines in equities and bonds, a setup that Chang says is consistent with rising risk premia rather than a conventional monetary-policy shock.

The strategist cautions that this easing of concern leaves markets more sensitive to smaller triggers. A forthcoming Fed leadership announcement could revive uncertainty if it exposes wider divergence within the Federal Open Market Committee.

She also points to the possibility of renewed attention on fiscal risks, especially if tariff plans run into legal constraints or policymakers revisit tax rebates.

“Neither of these outcomes is our baseline view. But neither tail is being very heavily weighted by the market now,” Chang said.

The unwind of earlier fears, she warns, now leaves markets more exposed, meaning even smaller developments could trigger renewed focus on these structural risks.

She also points out that the scenario in which those risks resurface is “relatively cheap to own” given how far volatility in FX and rates has declined.

The assets most likely to benefit in that tail event are a weaker U.S. dollar versus reserve and safe-haven currencies, a steeper U.S. yield curve, and higher gold prices, Chang highlighted.