Some $50 billion worth of bond sales from risk parity portfolios is just one of the reasons why Bank of America Merrill Lynch is flip-flopping on its favorite trade of 2016, now recommending that investors begin to short inflation-protected Treasury debt.
The ability of risk parity strategies — which typically rely on bonds moving in the opposite direction of stocks in order to appropriately diversify risk across the portfolio — to withstand the potential end of a multi-decade bull run in debt and simultaneous slump in equities has become a hot topic over the past year. The debate has been revived in recent months as analysts and investors fret over the ability of such systematic strategies to exacerbate swings in the market and worsen losses.
