Goldman: Range-Bound Yields Could Compress Vol. Premium Further

Goldman Sachs note “that U.S. rates implied volatility has moderated from its early Q422 peak alongside a compression in yield ranges, consistent with our view that a deceleration in the pace of policy tightening should see markets transition towards a lower vol. regime.”

• “Although we expect the rally will reverse, the sell-off in U.S. rates may not be all that large in the near term and is therefore unlikely to be as vol.-inducing as last year’s rates selloff.”
• “A bigger increase in U.S. yields will likely need an accumulation of supportive data over time and may occur only beyond the current quarter, in our view.”
• “Even as trading ranges narrow, it is worthwhile noting that day-to-day yield swings may nonetheless remain somewhat elevated, reflective of mixed economic data signals amid still relatively thin market liquidity.”
• “Though off the highs, implied vol. remains somewhat elevated, and breakeven ranges remain sufficiently wide (possibly wider than near term trading ranges), that we could see a pickup in unhedged tactical vol. selling, thereby further compressing vol. premium.”