It’s been a roller coaster of a quarter and I don’t think that was something most people expected.

After all, 2018 (or at least H1) was supposed to be more of the same in terms of synchronized global growth and still-subdued inflation. More “Goldilocks” please.

But all of that changed towards the end of January when the narrative around rate rise abruptly shifted as investors stopped viewing rising rates in the U.S. as a barometer for the robustness of the recovery and instead took the rapidity of the back up in yields as a warning sign. The briskest y/y wage growth since 2009 that came along with the January jobs report started tipping dominos and before you know it, the VIX had its largest one-day spike in history, the short vol. products were blowing up, CTAs and risk parity were de-risking, and global equities were in a correction.

No sooner had we dug ourselves out of that hole, than a certain “very stable genius” started a “hot” trade war with the Chinese and between that and the ongoing staff shakeups at the White House, we were all thusly fucked again. Then came the tech selloff. Oh, and LIBOR is back.

The only saving grace over the past could of weeks has been the extent to which the risk-off narrative has underpinned Treasurys, making the dreaded 3% on 10s seem like a pipe dream for the time being and indeed, rates look the least vulnerable. Here’s 3M10Y rates vol against a model that incorporates IG credit spreads, curve risk premium, FX vol and rate levels:


(Deutsche Bank)

So vol. is being pushed away from rates most recently, but as you can see, we seem to have broken the low vol. spell in 2018 across assets. Rates vol. could return if central banks make a communications “error” or if inflation expectations become untethered for whatever reason.

With all of that in mind, consider the following from Bloomberg’s Garfield Reynolds who thinks you should “enjoy those chocolates” – because next quarter could be just as trying as this one turned out to be.

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