Dangerously low volatility is looking like the calm before a major storm
London — Financial market volatility is slumping across the board to historically — or, dangerously — low levels, potentially fanning the flames for a repeat of February’s "volmageddon" explosion that sparked a 10% correction in US and world stocks. Major bond and currency markets remained reasonably insulated from the turmoil that swept through equities in February. They may not be so lucky next time around, because positioning in some cases is even more extreme than it is in stocks. A breakdown of how speculative investors like hedge funds are positioned across US futures markets shows that short VIX positions as a share of overall open interest are higher now than they were just before that record surge in February. The net short position in 10-year US treasuries as a share of total open interest is the highest since 2010 and close to a record high, while specs’ net long dollar bet as a share of open interest is the highest since May last year. Dollar positioning might not seem t...
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