Mirror, Mirror, Which Asset Class Is the Sleepiest of Them All?by
Realized volatility below long-term mean in nearly all assets
JPMorgan strategists warn that term premia are ‘too low’
Equity volatility is starting to evoke comparisons to Snow White -- and for good reason. With implied price swings at the lowest levels in more than 20 years, traders are wondering if anything can awaken stocks from their slumber.
In this regard, equities are far from alone. Given how nearly every asset class is seeing subdued levels of realized volatility, it’s more like the princess and all her seven dwarfs are named Sleepy.
The S&P 500 Index has the lowest levels of 13-week realized volatility relative to its 10-year average of the above chart, with the MSCI Emerging Markets Index not too far behind. Only West Texas Intermediate crude oil -- ironically, the only asset class which is being actively managed in a bid for stability -- is seeing levels of 13-week realized volatility above its 10-year average.
Amid fears that this low-vol environment will end in tears, strategists at JPMorgan Chase & Co. don’t see the majority of markets as exhibiting unjust levels of complacency.
"We do not consider all risk premia too low, and do not see that much risk in the future," write a team led by Jan Loeys, head of global asset allocation.
But if there is a nasty wake-up call ahead, look for the bond market to sound the alarm, they warn.
"Term premia on U.S. Treasuries remain negative, 1.5 sigma below their long-term mean, and are indeed too low to us," says Loeys, who recommends that investors stay short duration in developed-market bonds.
Many episodes of widespread risk aversion over the past five years have had their roots in or been greatly exacerbated by developments in the bond market, including the taper tantrum of 2013, the bund tantrum of 2015, and ’quantitative tightening’ following the surprise devaluation of the yuan.
"The medium-term forces of high global saving and below-normal capex should hold yields well below previous cycles," JPMorgan’s team concludes. "But stronger second-quarter growth and the coming Fed should push yields higher in the range."
And watch out for those poisoned apples.