The decline in oil prices has not only failed to relieve pressure on US Treasuries but has instead exposed the breakdown of the traditional relationship between energy and interest rates. Rich Privorotsky, head of Goldman Sachs' One-Delta trading desk, warned that bond yields remain under pressure and credit spreads are widening while oil prices are falling, suggesting the market may be facing something more than short-term volatility — a deeper structural shift.

In a recent internal report, Privorotsky described one recent trading session as "the most unsettling day of cross-asset signals in this crisis": credit spreads widening, rates continuing to come under pressure, and oil prices falling simultaneously. In the past, falling energy prices typically meant reduced inflation pressure and helped ease bond market stress, but this transmission mechanism is now weakening.

Privorotsky believes the problem may have shifted from an energy shock to fiscal financing itself. Elevated real yields may be precisely the "clearing price" that fiscally dominant economies must pay to attract private capital and finance massive sovereign debt. Once the risk-free real yield is high enough, government bonds will begin competing with stocks for the same pool of private savings.

Falling Energy Prices Cannot Relieve Rate Pressure

Privorotsky stated bluntly: "The link between energy and rates appears to be breaking down... if falling oil prices cannot solve the problem, the situation will become even more complex."

Although shipping through the Strait of Hormuz has largely recovered, the physical market remains tight, with spreads and freight rates staying elevated. The release of approximately 40 million barrels from strategic petroleum reserves can provide some buffer, but continuously declining inventories mean that any new imbalance between supply and demand could still trigger a larger price shock.

He believes natural gas may become Europe's more critical pressure valve. TTF prices have already fallen significantly, and if Qatar can add a small amount of daily LNG supply, Europe's supply-demand balance could improve further. However, the negotiation window is narrowing, and uncertainty remains.

In other words, falling energy prices are becoming increasingly unable to single-handedly play the role of "easing inflation — pushing down yields — improving financial conditions."

High Real Yields Are Raising the Bar for Stock Returns

Regarding the persistent pressure on interest rates, Privorotsky listed technical factors including yen appreciation compressing global balance sheet capacity, triggering carry trade unwinds, and extreme rate volatility making market makers "unwilling or unable" to continue providing adequate liquidity.

But in his view, these may only be surface manifestations. The deeper issue lies in fiscal financing needs.

"At some point, this is simply the clearing price that a fiscally dominant economy must pay to attract sufficient private capital to finance massive sovereign borrowing."

The impact on stock markets is more direct. Over the past several years, low real yields drove capital along the risk curve into assets like equities; if risk-free real returns remain persistently high, this process could reverse.

When government bonds can offer sufficiently high real returns, stocks must provide higher expected returns to attract private capital. In other words, the pressure facing stock markets is not just about valuations being squeezed by rising rates, but also about the upward shift in the center of risk-free asset returns systematically raising the bar for equity returns.

The resilience of the AI capital expenditure cycle is still providing support for stock markets, but Privorotsky said he will not chase higher positions until rates stabilize, credit spreads stop widening, and there is substantive progress in the energy situation.