With Monday’s financial media blasting reports about the VIX collapse to levels not seen in 24 years, going all the way back to 1993, it is worth remembering that the near record low volatility collapse of 1993 did not end well either for stocks, or for bonds, with the great 1994 bond tantrum. Reminding us of that, and of broader implications for the cross-asset space, is SocGen’s Kit Juckes with his overnight note, “The ghost of 1993”
The ghost of 1993
First things first: Collapsing vol is bad for the yen (and possibly worse for the Swiss franc, in this context) and good for yieldier currencies generally. It’s an invitation to add risk and yield to a portfolio if volatility-adjusted returns are expected to be higher as a result of the low vol. We’re happy to stay short JPY vs EUR, SEK, or indeed HUF and PLN. And SEK, HUF and PLN are all likely to remain supported for a while longer against the Swiss franc as the SNB finally gets the relief they crave, albeit with the caveat that it wouldn’t be at all surprising if the SNB were to use the rise in EUR/CHF to reduce its FX reserve mountain a bit.
Beyond the immediate reaction though, too little vol is too much of a good thing. Is it evidence of a quiet, news-free world? Not really.