Unknown Unknowns
The volatility that has marked trading during the first few weeks of the New Year continues unabated as the trends that have helped volatility re-emerge show no sign of abating. At this point, we will continue to be driven by the trinity of low oil prices, waning global growth and inflation/deflation concerns. The most obvious manifestation of these trends (at least to a fixed income guy) appears to be the utter capitulation of rates as the race to zero continues around the world. This brought the Treasury Bond to a YTD low of 2.37%, down almost 40 bps for the year, while Germany saw negative yields out to five years. The most recent JPM investor sentiment surveys since the start of the year also show some of the largest weekly changes to the net long position, despite rates falling to near, if not all time lows around the world. Presumably, the rates trade has been driven by falling inflation expectations, which have caused a plunge in term premia as the market has become increasingly convinced that global deflation is a bigger concern than rampant inflation. This sanguine view of price growth comes despite almost universal expectations for an aggressive QE announcement from the ECB, as soon as today (we will caveat that we are writing this before the announcement has been made, although press reports have recently coalesced around a EUR 50 billion/month QE for the next two years, totaling EUR 1.1 trillion). Stimulus also continues from Japan, although its latest moves did not expand into QQE3, while rate hike expectations in the US and UK continue to move towards later dates.
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