Goldman: Elevated Trading Volumes, Vols Reflect Significant Macro Uncertainty

Goldman Sachs write “despite some moderation from recent peaks, implied volatility remains elevated, particularly in the ‘upper left’. Realised volatility has been high, supporting some of this vol pick up. We have previously noted positioning, a significant deterioration in liquidity and macro uncertainty as potential contributory factors; trading volumes have remained elevated through this period, with weekly activity in shorter maturities matching elevated levels last seen in March 2020.”

• “In our view, the activity pattern across maturities is historically unusual, and reflects greater uncertainty about the near-term Fed policy path when compared to medium- and longer-term rate levels, where views appear to be converging back to long-held low neutral rate priors.”
• “The 3m2y/3m10y implied vol. tail curve, while off the extremes, remains extremely inverted, and should normalize as the intensity of banking system fears abates.”
• “One other explanation of the observed pattern of elevated volumes is that they reflect rush to raise cash, with more liquidations at shorter maturities. Notwithstanding the drop in Fed custodial holdings (which could be a one-off), we do not believe this to be the case. If there was indeed a rush to raise cash via U.S. Tsy liquidations, we would expect higher off-the-run trading volumes and a larger increase in yield errors across the Tsy curve than we currently observe.”