"The risk that 'once seen, cannot be ignored'! Goldman Sachs traders: The bond market is sending a warning to the stock market."
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On July 13, Brian Garrett, a senior derivatives trader at Goldman Sachs, issued a warning in his latest report: Beneath the calm surface of the current market, clear cracks have appeared in the bond market, while complacency in the stock market has reached a level rarely seen in recent years.
Garrett wrote in the report that summer trading patterns have fully emerged: since July, cash trading volumes have fallen sharply, the Volatility Index (VIX) closed near 14 on Friday, the S&P 500 is less than 0.5% from its all-time high, and Goldman’s panic indicator closed in the single digits—“the lowest since the Covid-19 pandemic.”
He believes the market is pricing in a “smooth sailing” earnings season, but “good times like these usually don’t last long.” At present, there is “carnage” in the bond market, but the stock market remains oblivious—the divergence between the two is intensifying. “Sometimes you hit the gas, sometimes the brakes.” Garrett’s stance: in the short term, he prefers the latter.
Bond Market “Bleeding”, Stock Market Unphased
Garrett pointed out that, for the first time in years, stress on Goldman’s bond trading desk last week clearly surpassed that of the equities volatility desk—he called this the “ultimate role reversal.”
The word used by the bond trading desk to describe today’s price action is “carnage”.
The reason is straightforward: Technology companies are issuing bonds intensively, the market is starting to resist, and “too much, too fast” sums it up.
Both bonds and stocks are financing tools for companies, but bond buyers tend to be more cautious and price in risk earlier than equity investors. When bond market investors start demanding higher returns before purchasing, it means their confidence in the company (or the sector) is fading—essentially an early warning signal.
Specifically: the credit spread on Goldman’s tracked mega-cap tech company bond basket (GSUCHS30) widened by 22 basis points last week alone. Garrett’s words: “That move is a lot.”
Credit spread can be understood as the “extra cost of borrowing”—the additional interest companies must pay compared to risk-free US Treasuries. The wider the spread, the higher the perceived borrower’s risk, or the more abundant the bond supply with too few buyers. An expansion of 22 basis points in a week is a clear anomaly in the bond market.
Meanwhile, the S&P 500 oscillated within a 30 basis point range, appearing completely unresponsive.
This is nothing new—the stock market has always ignored signals from the bond market, until suddenly it reacts all at once. The only question is timing. He said:
The stock market ignores all credit-related signals until it suddenly notices—and then everything falls apart.
How Unconcerned is the Stock Market About Risk?
The numbers are clear.
VIX (the market fear index) closed at 14, near historical lows. More extreme, short-term implied correlation hit a record low this week—implied correlation measures the degree to which stocks move together; the lower the number, the less the market expects a systemic selloff, with stocks moving independently of each other. This is the lowest in recorded history.
Hedging costs are absurdly cheap. The one-week straddle option (betting on a big move in either direction by buying both calls and puts) on the S&P 500 is currently priced at just 100 basis points, meaning the market sees “no significant events are expected in the coming week.”
Another detail: Last week, hedge funds were net buyers of stocks for the first time in four weeks, but this buying was driven by massive short covering, not new long positions. The ratio of short covering to fresh longs reached as high as 6.5 to 1. This isn’t a sign of renewed confidence; it looks more like forced closing of positions.
Single-Stock Options Skew: A “Can’t Unsee” Chart
Garrett wrote in the report: “Occasionally you see a chart that, once seen, you can’t ignore—this is one of those.”
He was referring to the chart comparing average single-stock call option skew with put option skew.
Currently, average single-stock call skew is almost at par with at-the-money implied volatility—in other words, the premium for upside calls has vanished. Meanwhile, average single-stock put skew has dropped to a 10-year low.
This means at the individual stock level, not only do fundamentals have to deliver strong results, but option pricing has fully reflected optimistic expectations—leaving almost no margin for error.
The driving force is capital continuously flowing into call options on large-cap tech stocks, with related positions back at historical highs.
Even more extreme: Among S&P 500 constituents, the 1-month 25-delta call option on a single stock is a full 30 volatility points more expensive than the corresponding index option. This means individual stocks not only face high performance hurdles fundamentally, but option pricing also implies extremely high upside expectations.
Leveraged ETF Growth: Another Side of Market Complacency
Garrett also highlighted another structural shift worth noting: the expansion of global leveraged ETFs.
As of the end of June, the notional exposure of US leveraged ETFs had reached about 3 trillion dollars. He predicts that, when people look back on the history of trading in 2026, “the rise of leveraged ETFs will warrant a chapter of its own.”
Meanwhile, Goldman Sachs Prime Brokerage data shows hedge funds were net buyers of stocks last week—for the first time in four weeks—but nearly all the buying was driven by short covering, not fresh long positions. The ratio of short covering to fresh longs hit 6.5 to 1, and triggered the largest single-stock deleveraging in more than three months.
Risk Warning and DisclaimerThe market has risks, investment requires caution. This article does not constitute individual investment advice, nor does it take your particular investment objectives, financial situation, or needs into account. Users should consider whether any opinions, views, or conclusions in this article are suitable for their situation. Investing accordingly is at your own risk. ```