It’s been all right-tail and no left- in recent weeks, according to option-implied, three-month ahead probabilities for benchmark US bonds.

On one hand, this isn’t an entirely new development. Left-tail odds diminished steadily since March’s mini-banking crisis came and went without a catastrophe.

But some of that was the market pricing out any chance of yields dropping below 3% in the near-term. More recently, where that means since the September FOMC meeting, the option-implied probability of yields falling to between 3-4% (so, a less extreme left-tail) have also dropped precipitously, from around a coin toss to ~25%.

At the same time, the odds of yields exceeding 5% rose from negligible to about a one-in-four chance. The figure below, from Goldman, illustrates the point.

“Option-implied probability distributions suggest that the initial bond selloff in early summer had been consistent with investors pricing out the risks of left-tail outcomes in the economy and a ‘higher-for-longer’ rate regime as the modal outcome as evidenced by the increased odds of 10-year yields between 4-5% [but] over the past few weeks, the selloff appears to be driven by shifts in tail probabilities,” Goldman’s Praveen Korapaty remarked.

In the bank’s assessment, the elevated right-tail odds likely aren’t sustainable. “Notwithstanding the upside surprise [from the September CPI report], core disinflation will likely continue over the coming months in our view, the FOMC is likely done with hikes for now and weak upcoming data could induce investors to reconsider whether the shift away from a left-tail focus to a right-tail focus is premature,” Korapaty went on.

The key point: A reversion in tail pricing to levels observed in early-September would push 10-year US yields down to between 4.2% and 4.3%. Happily, that’s consistent with Goldman’s estimate of fair value.

I highlight this because it’s yet another piece of incremental information which underscores the notion that even if you’re fully on board with a “higher-for-longer” narrative, and even if you’re likewise convinced that r-star is higher and think the term premium repricing was entirely appropriate (i.e., justified by supply-demand realities and concerns around America’s fiscal trajectory), you might still contend that the escalatory move observed from September 20 through the first several sessions in October constituted an overshoot.