It’s been very quiet in financial markets of late, even forgiving the mild volatility witnessed in Asia today.
Some may even call it boring.
To Goldman Sachs’ portfolio strategy research team, it’s a little too quiet for comfort right now, suggesting that it may be an opportune time for investors to take steps to protect against the unexpected.
We think it is time to consider all options, across assets. In line with realised, 3-month implied volatility is very low across assets and has declined across the board in the past three months – for most equity markets it is at the 0th percentile compared with the last 10 years. Ten-year rates volatility is also at decade lows, both in Europe and the US, despite the Fed hiking rates at its June meeting and signalling that balance sheet normalisation is likely to start soon and ECB tapering expected later this year. The same is the case for credit. The three-month ATM implied volatilities on US and European credit indices have all fallen to their tightest levels ever with history only since 2008.
They’re unprecedented times, as shown in this chart from Goldman.
It shows net short interest in the US VIX index — selling volatility — remains near the highest level on record.
Seemingly few expect volatility levels to lift.
It does signal a degree of complacency among investors, and, as such, Goldman says a broad portfolio hedge for both a equity selloff and rate shock risk “appears attractive”.