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Opinion

Pan-asset-class volatility: Where did all the vol go?

Traders hoping that an uptick in volatility is here to stay should be careful what they wish for.

It’s a question that continues to bother grey-haired observers. Pan-asset-class volatility has been absent for a long time but is now returning. Its absence made little or no sense because uncertainty should be the one feature of markets that can be relied on. Several observers have recently argued that hedge funds are the cause. Fitch says with some cogent arguments that leveraged liquidity is a key reason.

The absence of volatility is a mixed blessing. While conventional traders might like nicely trending markets, the more savvy are meant to relish market instability – that is, after all, when dislocations and opportunities become apparent. Until this year, volatility had been fleeting and generally seen as an opportunity to go long again. Not any longer – the sheer number of senior bankers looking for a sign that the credit cycle is set to turn is generally overwhelming. They worry about sub-prime and leveraged loans especially, and the recent shake-up in US treasuries, where the 10-year yield is now 5%, was another red signal.

There tends to be some seasonality to volatility: for the past few years the summer months have been jittery for financial markets – although the old adage that you should sell in May and not return until October would not quite have worked out because of the rapidity with which markets have snapped back to previous levels.

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