Goldman: Elevated US Rates Volatility Likely to Persist Into Fed Cuts

Goldman Sachs note that “implied volatility in US rates remains elevated despite the rapid normalization in risk asset vol following the spike at the start of the month.”

• They go on to note that their “valuation framework suggests that while the vol premium can be partially explained by elevated policy uncertainty, factors other than macro fundamentals - including elevated election uncertainty - are likely playing a role. This has corresponded to relative richness in shorter expiries and a pronounced inversion of the expiry curve.”
• “It is also not unusual for implied vol to rise into Fed cuts and remain elevated well after easing begins.”
• They conclude by noting that “even so, vol markets have historically underpriced realized volatility in rates ahead of the first Fed cut and overpriced it after, suggesting potential opportunities to fade the elevated vol premium once the cuts are underway and election-related uncertainty recedes somewhat.”