What I Learned This Week

The corporate bond market sends a clear message: there will be few places to hide when rising rates force low-volatility-pegged strategies to unwind.

For months, we have warned about the toxic co-dependence between rules-based strategies, leverage, and low volatility. In early February, we got a glimpse of the downside power of this dynamic—volatility spiked, triggering a flash crash as algorithms sold in unison (WILTW February 15, 2018). Yet, more than $2 trillion remains in the hands of financial-engineering strategies pegged to low volatility, including volatility-control funds, risk parity, risk premia, and long-equity-trend following. In our estimation, the market faces no greater risk today than rising interest rates forcing these strategies to unwind, thus spiking interest rates beyond the control of the Fed. As always, the paramo…

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