Great article in Bloomberg highlighting the disappearance of volatility in FI due to central bank’s interventionist policy. To reiterate a well-understood fact, central banks are suppressing the true price of risk in rates, which in turn are distorting all other market risk measures. Worryingly investors are significantly underpricing the real price of risk. Seven months ago Greece 2-year yields were at 9.5%, now stand at 2.67%, on par with dysfunctional Argentina and only 60bp above AA New Zealand. In terms of Greece there is the view that ECB convergence trade is back on (thanks to Merkel clear pro-EU platform and yesterday’s Macron speech on EU integration), making Greek sovereign debt ultimately backstopped by the ECB.
In broader terms, rightly so investors are aware that Central banks have discovered the miracle solution for managing debt and default avoidance, unadulterated raw capital creation. So if there is no longer credit risk (currency risk can be hedged) any return is a good return. This is also why the Swiss National Bank stock (yes the SNB is a publicly traded company) continues to rally. Printing CHF to buy asset such as EUR and equites (over chf60bn in stocks) is a great business model. VIX index is trading at 12 despite the lingering concern of potential nuclear war. Capital continues to flow out of the USD and into emerging markets as risk sentiment remains strong.
By Peter Rosenstreich