Goldman Sachs’ big rate bets backfire as war-driven inflation fears lift interest rates

Goldman Sachs’ fixed income, currencies and commodities division recorded a 10% drop in first-quarter revenues after its bets on falling interest rates collapsed when the Iran war reshaped inflation and growth expectations. The bank had positioned its rates trading desk to profit from a weakening U.S. economy and lower borrowing costs, aligning with expectations of Federal Reserve rate cuts. But the outbreak of war in late February triggered a sudden market reassessment: instead of slowing growth leading to easier monetary policy, investors began pricing in the risk of stagflation—slower growth alongside rising inflation—prompted by geopolitical disruption. That scenario increased the likelihood that the Federal Reserve, the Bank of England and the European Central Bank would hold or even raise interest rates. The reversal hit Goldman’s positions directly, as market prices moved sharply against its trades. While rivals including JPMorgan Chase, Citigroup and Morgan Stanley posted strong double-digit gains in similar trading divisions, Goldman’s rates desk became the primary source of weakness. Volatility also amplified losses during client-driven trading surges, as the bank facilitated large-scale position unwinds. Still, the firm reported its highest quarterly profit in five years, powered by a record $5.3 billion in equities trading revenue—a reminder that the same turmoil that eroded one division’s returns turbocharged another.