Goldman Sachs has pointed out that rapidly climbing US Treasury yields are undermining macro investor confidence, while the traditionally tight relationship between oil prices and bonds has also begun to loosen, leaving the market without a key trading anchor. At the same time, shorting volatility has become one of the best-performing systematic strategies this year, but stock and rate volatility trends are diverging sharply, and combined with record short volatility positioning, the market faces hidden risks of a squeeze-driven unwind. Goldman Sachs recommends watching opportunities outside the AI sector and considering volatility hedges.

The rapid selloff in the bond market is shaking macro investors' confidence, and what unsettles them even more is that a trading anchor used for years is now failing. According to Louis Miller, Managing Director at Goldman Sachs GSX trading desk, in his latest "Global Reflections" report, he visited multiple macro clients over the past week and received three core pieces of feedback: the speed of rate increases is more worrying than the terminal level; oil and rates, once inseparable assets, have quietly decoupled; and no one can predict the path to de-escalation in the Middle East. Taken together, these three points mean macro investors must not only endure severe bond market volatility but have also lost their most important forward-looking indicator.

Meanwhile, Goldman Sachs internal data shows that the best-performing systematic strategy in 2026 is precisely large-scale shorting of volatility — that is, betting that the market will not experience violent swings. This stands in sharp contradiction to clients' deep concerns about "speed risk" and plants potential fragility in the market.

Speed Is the Real Risk

Miller noted that clients' core concern is not the 5.25% yield level itself, but the speed at which that level was reached. Since the end of August, the 10-year US Treasury yield has risen by about 68 basis points cumulatively, and Goldman Sachs rates strategist Rikin Shah characterized the past month's move as a two-standard-deviation event. Data from Goldman Sachs MarketStrats team shows that the 2-year yield has risen 64 basis points since August 4 and 149 basis points cumulatively since the end of February; the 3-month implied volatility on 10-year dollar interest rate swaps has risen 28 basis points, or 2.3 standard deviations, sitting at the 100th percentile of the past year.

Looking at specific figures, the 10-year US Treasury yield was 4.77% on September 3 and had risen to about 5.32% by last Thursday; on the same day, the 30-year Treasury auction priced at a yield of 5.618%, the highest since August 2000; the 10-year Treasury auction yield was 5.30%, also a new high since 2000. Yields ultimately ended the week at 5.25%, with the 2-year closing at 4.80%. Goldman Sachs rates trader April Li further pointed out that the most recent 20 basis point rise is different in nature from earlier moves: previously it was bear flattening, while the latest leg is bear steepening. With 100 basis points of hikes already priced in, upside room at the short end is nearly exhausted, selling pressure is shifting to the long end, and term premium continues to accumulate under the combined weight of fiscal pressure, sustained supply increases, inflation uncertainty, and a shrinking marginal buyer base.

Li also emphasized that the yield level alone is not enough to attract real duration demand back. Whether the 10-year rises to 5.5% or the 30-year rises to 6%, large-scale buying is difficult to achieve in such a high-volatility environment. One piece of evidence: the Treasury's latest bond buyback operation attracted $46 billion in bids, while the average for previous operations was about $10 billion, which Li interpreted as a signal that investors are using buybacks to sell inactive bonds.

The Decoupling of Oil and Bonds

For most of the Hormuz crisis, the bond market had a clear operating logic: follow Brent crude. Rising oil prices meant rising inflation, which meant rising rate hike expectations, which in turn pushed yields higher. However, Miller said this relationship has now failed, leaving clients deeply uneasy. This week's market action provided a complete chain of evidence. On Monday, oil prices and yields rose in tandem briefly, then oil gave back gains while Treasuries continued to fall; on Thursday, news that the US would not strike Iran before the midterm elections briefly lifted bonds, but the relief rally in crude was fleeting. For the full week, oil rose about $2.5 while the 10-year Treasury yield was essentially flat.

April Li gave the most concise description of the new regime: the sensitivity of Treasuries to oil prices has become asymmetric — when crude falls, bonds barely benefit; when crude rises, bonds still come under pressure. In other words, bad news for oil is still bad news for bonds, but good news for oil is no longer good news for bonds. Goldman Sachs London rates strategist Mark Wilson holds a different view, noting in a Friday report that long-end yields remain closely correlated with 12-month forward oil prices, and that stabilizing energy prices would help ease the bond selloff and drive an end-of-year equity rally. The two views are not entirely contradictory: spot Brent crude includes a $22 per barrel risk premium estimated by Goldman Sachs commodities team, the second-highest monthly reading in history, making it a geopolitically driven headline instrument; the back end of the forward curve is the real inflation pricing tool.

For macro investors, the practical implication is direct: the best hedge for being long oil used to be the trade itself — a ceasefire would push oil lower while duration assets would rebound. If de-escalation can no longer save bonds, then those clients who told Miller they "cannot predict the direction of the situation" have also lost their reason to wait for de-escalation.

Equity Market Divergence and the AI Island

Miller's weekly charts show that the stock market's response to the above pressures is clearly visible. Year to date, the S&P 500 is up about 14%, but the S&P excluding AI stocks (SPXXAI) is up only about 7%, and the gap between the two has widened to a record 10 percentage points at one point over the past five weeks. Miller's conclusion is that the market excluding AI has already digested the dual pressures of rates and oil, current positioning is light, and he favors starting to add non-AI exposure, including consumer experience, healthcare, and SPXXAI call options (the November 103% strike call costs 0.75%). Healthcare's appeal lies in its near-zero correlation with AI, oil, and the 10-year yield.

Goldman Sachs' Jack Singer provided a historical benchmark: since 1974, the median S&P 500 return in the month before midterm elections has been -3.5%, and +6.5% in the four months after the election.

The Feast and Hidden Risks of Shorting Volatility

The strategy performance leaderboard appended to the end of Miller's report reveals a deep contradiction. Among the 21 systematic strategies listed, 10 are some form of short volatility or skew harvesting, and another 5 are dispersion strategies. Ranked by Sharpe ratio, the top five are all short volatility strategies: daily equity skew harvesting (4.34), copper volatility arbitrage (3.55, year-to-date return +30.9%), weekly S&P variance arbitrage (3.15), weekly WTI volatility arbitrage (2.69), and VIX volatility arbitrage (2.68).

However, significant fragility has accumulated behind this feast. Goldman Sachs STS team noted that over the past year, the S&P 500's 1-month realized volatility has consistently been below 13%, while the VIX average has been 18. Asset managers' net short positions in VIX futures have hit a record, surpassing the July 2024 peak, and the volatility of volatility has fallen to near August lows. Equity volatility trader Oriol Lozano cited data showing that dealer gamma positioning is estimated at a record high, and assets in the five largest S&P oversubscribed ETFs surpassed $65 billion in early October.

Goldman Sachs US rates trading desk noted that continued risk reduction by short volatility accounts is itself keeping rate volatility elevated, and record-high rate volatility in turn deepens the bond selloff by squeezing arbitrage trades — a self-reinforcing mechanism: the strategy works until volatility rises; and volatility rises precisely because the strategy is being unwound. The current setup is: rate volatility at the top of its one-year range, equity volatility at the bottom, with the divergence at a record. While clients tell Miller about speed risk, the most profitable strategies on the leaderboard are precisely large-scale sales of protection against speed in every asset class.

One hedge recommended by Goldman Sachs this week is the VIX November 20/30 call spread, costing 0.81, with a maximum payout ratio of 12 to 1 — when the institution publishing the performance leaderboard simultaneously recommends buying volatility squeeze trades, that itself is a signal worth noting.

Risk Disclosure and Disclaimer

Markets carry risk, and investing requires caution. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investment based on this article is at one's own risk.