Testing Signals

Alot was written and said last week about the breakdown in the inverse correlation between bonds and equities, which struck fear into the markets that there was no safe place to park money in the event of an equity market rout, aside from cash that is. Of course it’s all the fault of Risk Parity (Isn’t it?). we thought we’d flag up the work that’s BAML have done in this area the easily pre dates last week. In a piece published on Dec 14 last year ”Moving on from the safe house” BAML analysts predicted that the conventional wisdom about the ‘safe haven’ and diversification attractiveness of USTs will likely be challenged in 2018. While no mention was made of ”short vol unwinds,” BAML argued that the possible increase in deposit betas (given hikes and Fed balance sheet run-off) will make cash a competitor to US Treasuries. Indeed, history also suggested equity corrections that happen in a high growth and high inflation environments are not hedged by Treasuries. This is what seems to be playing out now, BAML writes in last Friday’s Global Rates Weekly. BAML clients can read the full piece on BAML Mercury.