- Bond yields have been rising for long enough for stock investors to account for inflation and interest rate tightening.
- Stock repricing is not a reflection of economic downturn, just of a market adjustment in a slightly overheated environment.
- Diversify your portfolio across asset classes. Yields may go notably above 3% soon.
Stocks swung wildly in late January and early February, and while the bond market may have provided the spark, the embers were smoldering in the stock market for quite some time. It was the sudden unwinding of short volatility trades, which are leveraged bets that volatility will remain low, that set off the fireworks. When traders had to exit these trades, the door wasn’t wide enough for everyone to get out unsigned.
These “short-volatility” traders simply overstayed their welcome. The trades worked well during the quantitative easing (QE) era—when central banks around the world were buying government securities to increase the money supply and lower interest rates—because QE suppressed volatility along with bond yields. That provided a rare opportunity to get high returns in risk assets without the usual volatility. However, with central banks unwinding QE, it was inevitable that yields and volatility would rise. They apparently rose a lot faster than most of these traders expected.See the rest of the story at Business Insider
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See Also:
- Last week’s market chaos could be a harbinger of worse to come
- Short bets against the 10-year have never been this high
- The bond market is entering a new era
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