HAIRLINE FRACTURES TO LOW VOLATILITY EMERGE AND WITH IT COMES…HOPE
One of the more enduring (and frustrating) aspects of the yield compression we have experienced since the start of the year (other than we did not see rates getting to these levels) has been the utter lack of volatility in the global financial markets. While the decline in sovereign yields has been front and center in the collapsing volatility story, it has extended into the far reaches of the financial markets. When looking at volatilities across a wide swath of global asset classes, our analysis indicates that year-to-date (YTD) volumes are running at half of last year’s levels in equity indices, 40% in foreign exchange, and 35% on global bond markets. New York Fed President Dudley put the following spin on the declining volatility yesterday, as reported by Reuters: “Volatility in the markets right now is unusually low,” he said, highlighting that it is at 2006-07 levels, and not just fixed income, but foreign exchange and equities too. In fact, we heard no less than three Fed members this past week (Dudley, Fisher and Williams) express concerns about the market’s lack of volatility, usually from the troubling aspects that low volume creates. Since we have been of the thought that the only group that appreciates this low volatility is the Fed, the markets may have pushed their wishes too far, and we might be able to break through this logjam. More recently, the same volatility figures we used above have shown a more neutral bias (volumes stabilizing versus start-of-year levels) and in certain instances have started to increase. In particular, higher volume measures have emerged in most euro sovereign markets, particularly in the periphery bond markets. IG corporate volatility has also started to track higher, although it remains at such a low level that we will have to reserve judgment as to whether there is a sustained movement back towards historical levels. Nevertheless, these small changes are at least movements in the correct direction and may provide a spark to the market during an otherwise uneventful summer. Continue reading…