Chart of the Week - The Calm
Chart of the Week - The Calm
US high yield credit spreads have dropped down to the bottom end of the range, and likewise equity volatility has been lulled into slumber...
And fair enough, the macro backdrop has improved, financial conditions have eased, and sentiment has been overwhelmingly bullish as stocks move up to the right.
It echoes what I recently noted with Emerging Markets, where the composite risk pricing indicator (EM credit spreads, sovereign CDS pricing, equity volatility, and FX volatility) was approaching a record low.
There is definitely an upside from The Calm: it can form a self-reinforcing feedback loop where lower volatility enables confidence effects; a more bullish mood, which plays out in higher asset prices, cheaper and more freely available funding.
BUT It also indicates complacency. With the exception of the great moderation in 2004-07, volatility and credit spreads rarely spend long at these lows.
Indeed, you might wonder: given upside risks to inflation, heightened and lingering (geo)political risk, expensive valuations and excessive bullish sentiment… is it all just a little “too calm“? $Cboe Volatility Index(VIX)$ $SPDR Bloomberg High Yield Bond ETF(JNK)$ $iShares iBoxx $ High Yield Corporate Bond ETF(HYG)$ $S&P 500(.SPX)$
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https://twitter.com/Callum_Thomas/status/1775066182955209189
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