“A risk that cannot be ignored once seen”! Goldman Sachs trader: The bond market is sending a warning to the stock market

On July 13, Brian Garrett, a senior trader at the derivatives desk of Goldman Sachs, issued a warning in his latest report: Beneath the current surface calm, obvious cracks have emerged in the bond market, while the stock market’s complacency has reached a rarely seen recent high.

Garrett wrote in the report that summer market characteristics are in full effect: since July, cash trading volumes have sharply declined, the volatility index VIX closed near 14 on Friday, the S&P 500 is within 0.5% of its all-time high, and Goldman Sachs’ panic indicator closed in single-digits—“the lowest level since the COVID-19 pandemic.”

He believes the market is pricing in a “smooth ride” for earnings season, but “this kind of good time usually doesn’t last long.” Right now, the bond market is seeing “carnage”, while the stock market remains oblivious; the divergence between the two is intensifying. “Sometimes you need to hit the gas, sometimes the brakes.” Garrett’s stance: in the short term, he prefers the latter.

“Bleeding” in Bonds, Stock Market Unfazed

Garrett pointed out that last week, for the first time in years, Goldman Sachs’ bond traders were noticeably more anxious than the equity volatility desk—what he describes as “the ultimate role reversal.”

The word used by the bond desk to describe current price action is “carnage”.

The reason is simple: Technology companies have been issuing bonds intensively, and the market is starting to push back—“too much, too fast” sums it up best.

Bonds and stocks are both financing tools for companies, but bond investors tend to be more cautious than stock investors, pricing in risks earlier. When bond market investors start demanding higher returns to buy debt, it signals declining confidence in a company (or sector)—essentially serving as an early warning signal.

Specifically: the ultra-large cap tech bond basket tracked by Goldman Sachs (GSUCHS30) saw its credit spread widen by 22 basis points in a single week. Garrett’s original words: “That’s a lot.”

A credit spread can be understood as “the extra cost of borrowing”—the additional rate on corporate bonds compared to risk-free US Treasuries. The bigger this number, the higher the market perceives borrower risk, or the more supply there is relative to buyers. A 22-basis-point widening in one week marks a significant market move for bonds.

Meanwhile, the S&P 500 oscillated within a 30 basis point range (UTC+8), seemingly unfazed by the developments.

This is nothing new; the stock market has always tended to ignore signals from the bond market—until, at some point, it suddenly reacts across the board. The only question is timing. As he stated:

The stock market will ignore all credit-related signals until it suddenly pays attention—and then everything gets messy.

The numbers speak for themselves.

VIX (market fear index) closed at 14, near historic lows. More extreme, short-term implied correlation hit an all-time record low this week—implied correlation measures “how likely it is for individual stocks to move up or down together.” The lower this number, the less the market expects systemic, simultaneous moves across stocks. This is the lowest on record.

Hedging costs are also absurdly cheap. The price for a one-week at-the-money straddle on the S&P 500 (buying both a call and a put, betting on a large move in either direction) is currently just 100 basis points (UTC+8), pricing in no expectation of any material event in the coming week.

Another detail: last week, hedge funds were net buyers of stocks for the first time in four weeks, but the buying came almost entirely from large-scale short covering, not active long positioning. The ratio of short covering to active buying was as high as 6.5-to-1. This isn’t renewed confidence—it looks more like forced closing of positions.

Single-Stock Option Skew: A Chart You Can't Unsee

Garrett wrote in his report: “Occasionally you see a chart that, once you’ve seen it, you can’t unsee—this is one of them.”

He was referring to the chart comparing average call option skew to average put option skew on single stocks.

Currently, the average single-stock call option skew is almost equal to at-the-money implied volatility—in other words, the market premium for upside options has disappeared. At the same time, average single-stock put option skew has fallen to a ten-year low.

This means that not only do fundamentals need to deliver for individual stocks, but option pricing has already fully reflected optimistic expectations—leaving almost no room for error.

Driving this is sustained flows piling into call options on large-cap tech stocks, pushing related positions back to historical highs.

Even more extreme, among S&P 500 components, a single stock’s one-month 25-delta call option is now a full 30 volatility points more expensive than the comparable index option. This means that single stocks are not only facing high performance bars fundamentally, but also extreme pressure from market expectations reflected in options pricing.

Leveraged ETF Explosion: Another Side of Market Complacency

Garrett also highlighted another structural shift worth noting: the global expansion in leveraged ETF size.

As of end-June, US leveraged ETFs had a notional exposure of roughly $3 trillion. He predicts that when market participants look back at the trading history of 2026, “the rise of leveraged ETFs will occupy a dedicated chapter.”

Meanwhile, Goldman Sachs Prime Brokerage data shows hedge funds were, for the first time in four weeks, net buyers of equities last week—but the buying was driven almost entirely by short covering, not fresh longs. The ratio of short covering to new buying was as high as 6.5-to-1, triggering the biggest single stock deleveraging move in over three months.