Nomura anticipates U.S. Treasuries will gain from increasing worries about a potential economic slowdown. Yields are projected to decline further if the labour market shows notable signs of weakening.

In communication to clients, the bank indicated that a strong labour market might cause only slight drops in yields. However, any sign of labour market frailty could quicken the decrease in yields.

Market Trends Become More Influential

This cautious outlook aligns with a wider market trend where slower growth is becoming more influential than inflation in determining bond market movements.

What this means, in simple terms, is that investors are starting to pay more attention to how weak the economy might get, rather than staying solely fixed on inflation. The logic behind this is fairly clear: when growth concerns increase, people tend to move money into what’s seen as safer assets. U.S. Treasuries, for many, tick that box.

With that in mind, Smith is essentially saying that the job market has become a key signal. If hiring slows or wages stall, then the fear of broader economic weakness becomes harder to dismiss. That would likely push more demand into government bonds, causing yields to fall. On the other hand, if employment data remains firm, then the drop in yields will probably be shallow, or take more time to materialise.

For those of us trading derivatives around interest rates, this creates an asymmetric risk profile. Longer-duration bets could benefit if the next jobs report underwhelms. Keeping positions tilted in that direction seems warranted, especially given how market expectations have started to shift away from inflation-led rate fears to growth-linked caution.

Watching Implied Volatility

We’re closely watching implied volatility around near-term expiry contracts in the rates space. What’s happened over the past couple of weeks is that pricing has subtly started to reflect less certainty about future hikes. Futures curves are beginning to flatten at the front. That tells us traders remain on the lookout for confirmation from economic data. It also suggests that rallies in rates could accelerate quickly if expectations shift dramatically.

Lee’s approach frames this potential pivot well—if yields start dropping faster than expected, there’s room for convexity trades to perform better than static directional wagers. It may be time to lean more into protection strategies that pay off during sharp yield declines. Not because of panic, but because the relative cost of positioning that way has dropped, particularly as vol sellers start to fade into thinner conditions ahead of major calendar events.

Market depth has also thinned noticeably this month, probably due to a mix of summer trading patterns and fund rotation. What that does, in effect, is create a sharper move environment when data misses occur. We’d expect lower liquidity pockets to exaggerate initial reactions. That could lead to more two-directional days, but also create march-forwards in option premium.

An interesting side note is how credit spreads have held fairly steady even while rates trades price in a more cautious backdrop. That backs up the idea that traders aren’t expecting a disorderly slowdown, but rather something more gradual—which could ironically support bond markets longer.

In structured positions, skew levels are flashing a light warning. Upside tails on rates are still being slightly overbought, likely by macro hedgers, but that premium isn’t widening. We interpret this as a sign that the current mood is cautious, though not outright defensive.

The takeaway here is that data surprises will probably drive short-term volatility more than anything else. Knowing where to sit along the curve, and when to shift that outlook, will likely become more important than net risk exposure levels. Adjusting for surprise elasticity around each upcoming release looks to be the margin that separates flat trading from finding an edge in the near term.

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