Global bond yields have climbed to multi-decade highs, yet economies and markets have so far displayed remarkable resilience. With stress beginning to surface in areas such as European sovereign bond markets, whether this resilience can persist has become the market's most pressing question.

Goldman Sachs' latest research report brings together assessments from the International Monetary Fund, Moody's Analytics and Goldman Sachs economists. IMF advisor Tobias Adrian takes a cautiously optimistic stance, arguing that as long as the rise in yields does not accelerate in a disorderly manner, the global economy can be expected to maintain its ability to withstand pressure. Goldman Sachs economists, meanwhile, expect the drag from higher rates on US economic growth to be relatively modest, at about 0.2 percentage points in 2027, but if yields stay at current levels, that drag would more than double to 0.5 percentage points. Moody's Analytics chief economist Mark Zandi is markedly more pessimistic 鈥?he bluntly describes the US economy as "fragile" rather than "resilient," and puts the probability of the economy going completely off the rails at roughly one in three.

At the market level, Goldman Sachs strategists broadly believe the banking system and equity markets do not yet pose a systemic threat, but warn that if yields rise further or rate volatility stays elevated, risk assets will face increasingly heavy pressure. The greatest common denominator across all these perspectives points to the same core question: can the highly interconnected, leverage-stacked AI investment boom withstand a prolonged environment of high interest rates? Zandi issued the most direct warning of all: if rates stay at current or higher levels for another one or two quarters, "AI may be the first part of the economy to crack."

Yields Rising: Mostly Fundamental, Technical Factors Add Fuel

The most striking feature of this global rise in bond yields is its breadth. Goldman Sachs head of US rates strategy William Marshall noted that yields have risen across all major economies, with no obvious single leading market or trigger, and that both the front end and the long end of the curve have simultaneously hit new highs.

In terms of drivers, Marshall attributes the move mainly to fundamentals: strong economic growth, inflation risk, hawkish central bank policy shifts, a sustained investment cycle and long-term fiscal risk. The term premium 鈥?the extra compensation investors demand for holding duration assets 鈥?has surged to its highest level in more than a decade. The sharp rise in yields since late September, meanwhile, has been compounded by technical factors related to hedging risk, pushing yields above levels implied by fundamentals.

On the outlook, Marshall expects yields to fall as the market becomes more convinced that inflation is easing, but stresses that long-term high yields will have a degree of stickiness. Energy price swings and fiscal pressures pose the main upside risks, while the continued expansion of AI capital expenditure and the corresponding debt issuance are also weighing on demand for duration assets, leaving the risk to long-end yields skewed to the upside.

Growth Drag: Mild in the Base Case, but Risks Multiply If High Rates Persist

Goldman Sachs US economist Pierfrancesco Mei characterizes the current US economy as resilient, and expects that in the base case 鈥?one more Fed rate hike in December, followed by three rate cuts starting in the second half of 2027, with the 10-year Treasury yield falling to 4.4% by year-end 鈥?the drag from higher rates on 2027 GDP growth will be only about 0.2 percentage points.

However, if yields stay at current levels, the drag would exceed 0.5 percentage points. Looking at the transmission channels, 30-year mortgage rates breaking above 7% will further suppress residential investment; consumer spending will be dragged down by about 0.2 percentage points as demand for durable goods weakens; and rising interest expenses for non-AI companies refinancing maturing debt are expected to weigh on capital expenditure growth by about 0.3 percentage points.

Goldman Sachs global economists Joseph Briggs and Johan Allen constructed a quantitative rule framework: every 100 basis points of higher rates would cut residential investment in major developed economies by about 6%, consumer spending by about 0.2% on average, and corporate capital expenditure by about 1.8%, together producing a drag of roughly 0.6 percentage points on developed-economy GDP. On the fiscal side, large primary deficits combined with high rates are expected to push the US debt-to-GDP ratio to 124% by 2035 (base case) or even 132% (if current rates persist).

Is the Economy Really "Resilient"? Zandi Dissents

Amid a market discussion with a relatively optimistic overall tone, Mark Zandi is the most cautious voice. He argues that describing the US economy as "resilient" is "fascinating, almost frustrating," and that the correct description should be "fragile."

Zandi points out that the labor market is the clearest sign of weakness. Over the past year, monthly job gains have averaged about 40,000, and are close to zero when the healthcare sector is excluded; while the unemployment rate remains low, that is partly due to a decline in the labor force participation rate 鈥?adjusting for that, the true unemployment rate would be in the mid-4% range, above the full-employment level. Real wage growth is actually negative for low- and middle-income groups, and household savings are being steadily depleted.

On headline data, Zandi is not comforted by roughly 2% real GDP growth. He estimates that about one-third of it 鈥?0.6 to 0.7 percentage points 鈥?comes from AI-related activity (including the net contribution of AI capital expenditure and the wealth effect from AI-related share prices). That means the non-AI economy is growing at only about 1% to 1.5%, "a pretty lousy state of the economy."

Zandi also describes the US fiscal position as "the worst situation I have ever seen": a deficit above 6% of GDP, a primary deficit above 3%, debt at about 100% of GDP and projected to rise to 125% in a decade, and federal interest expense already above $1 trillion and rising fast. His probability assessment: roughly a one-in-four chance of a severe bond market sell-off, and roughly a one-in-three chance the economy derails completely.

Banks and Credit Markets: Still Within Controllable Range

Although Mark Zandi remains highly alert to the risk of a potential rupture in the financial system, Goldman Sachs analysts take a relatively moderate view of banks and credit markets.

Tobias Adrian, former head of the IMF's monetary and capital markets department, and Richard Ramsden, head of Goldman Sachs' financial equity research team, both believe banks need not be overly feared. Ramsden notes that given the asset-sensitive balance sheet structure of US banks, higher rates should help lift net interest income; absent a broader economic downturn, credit quality should not deteriorate significantly; and after accounting for unrealized losses on rate-driven securities portfolios, most banks should still hold excess capital.

In credit markets, Goldman Sachs chief credit strategist Amanda Lynam believes the hit to corporate credit from high rates is broadly manageable against the backdrop of solid growth and is not enough to trigger a significant rise in default rates. But she also notes that if rate volatility returns to the highs of 2022-2023, confidence among yield-driven institutional investors would be shaken, and demand for investment-grade credit would come under substantial pressure.

US Equities: Current Rates Are Not Yet a Threat, but Upside Risks Cannot Be Ignored

Goldman Sachs chief US equity strategist Ben Snider believes current yield levels should not stop US stocks from continuing to rise. Although the S&P 500's price-to-earnings ratio has fallen from 23x to 19x this year, strong earnings growth (over 30% in the past 12 months) has been enough to offset valuation compression, and the current relative valuation of stocks versus bonds 鈥?measured by the gap between the S&P 500 earnings yield and the 10-year real Treasury yield 鈥?is about 230 basis points, relatively stable over the past two years, suggesting valuations have largely completed their recalibration to higher yields.

However, Snider also flags two risks to watch closely. First, if the 10-year Treasury yield rises more than about 50 basis points (two standard deviations) within a single month, it would trigger the typical pattern of equity market pressure seen historically. Second, rate-sensitive sectors such as small caps, real estate and homebuilders have already diverged markedly, with market breadth falling to its lowest level since the dot-com bubble. Goldman Sachs multi-asset strategists Christian Mueller-Glissmann and Andrea Ferrario add that higher bond yields are reinforcing the strategic allocation value of bonds in multi-asset portfolios, with the optimal bond allocation moving toward the long-term average of 35% to 55%, but strong earnings growth still makes stocks relatively more attractive than bonds for now.

AI: The Potential Weakest Link Beneath the High-Growth Narrative

In the current economic and market debate, AI is both the core engine supporting growth and the most closely watched potential vulnerability in a high-rate environment.

On the optimistic side, Goldman Sachs analysis sees limited risk of AI capital expenditure coming under pressure. Hyperscalers' capital spending has so far shown strong resilience to higher rates and rising costs, accounting for more than two-thirds of US AI investment; major AI-related issuers such as MSFT, META, AMZN, GOOGL and NVDA generally carry credit ratings between AAA and AA, with AAA/AA issuers enjoying interest coverage of 27.7x and net leverage of just 0.5x, leaving ample debt capacity; Lynam also believes the bar for disruption to AI-related debt issuance is extremely high.

However, Tobias Adrian is concerned about three risks within the AI complex: the interconnectedness and circularity of investments among multiple AI companies, meaning an earnings shock at one company could spread quickly; the structure of leverage stacked on leverage built by AI companies and investors through leveraged ETFs and derivatives; and the fundamental uncertainty over whether AI companies' strong revenue growth can be sustained.

Mark Zandi's warning is the most direct: "If rates stay at current or higher levels for another one or two quarters, AI may be the first link in the economy to break." He notes that persistently high rates would weigh on AI-related share prices, and a reversal of the wealth effect would further suppress consumption, while rising financing costs would make it increasingly difficult to raise the capital needed to sustain the current pace of AI buildout. At present, AI runs to a large extent on its own momentum and market optimism, but how long that can last is highly uncertain.