|I saw an interesting interview last week with Chris Cole (Artemis Capital). He gave an example of the Cold War, where we had peace (low volatility) however any number of things could have happened that could have triggered a nuclear disaster. Since he is a vol trader, he was referring to the current environment of high risk but low volatility.
I suppose I had been thinking something similar, in that I have been saying the tail risks to both sides have been quite large. It’s somewhat unusual to think that we can get a huge move and not have a good feel on direction. In fact, if we are 75+bps from here by the end of June (not my central prediction – just my range), it would not surprise me. I just have no strong view on direction, so I have not done anything other than buy some cheap crisis protection. I had been leaning slightly bullish, mostly because everyone is bearish and we haven’t been able to sell off. Now I’m not saying to go out and buy vol. You can’t exactly go out and buy straddles/strangles without a timing view because we have seen from past years that could be lighting money on fire. But like Chris Cole, I do think about the extreme scenarios and rather than spend a lot of outright premium, think about what the curve would look like and position accordingly.
The calendar is action-packed right now, and so we could easily get some events to help shape our longer-term view. We have a number of potentially critical turning points in the next two weeks:
CLICK TO READ THE REST OF THIS ARTICLE FROM THE CA WEB SITE
Next Week: I discuss some takeaways from the run-up in the March FOMC hike probability.