It's Not Just The Markets: Economic Volatility Tumbles To 50 Year Lows

After a September with the lowest implied vol on record, October is starting off with the lowest (annualized) realized vol on record.

Of course, as we have shown previously when looking across capital markets, it’s not just equities: vol has dropped to all-time lows across virtually every asset class.

All of this should be familiar to readers who have been observing the effect of central bank liquidity injections across markets. What may come as a surprise, however, is that according to a new analysis by Bank of America, the standard deviation of global growth is the lowest it has been in decades at the same time growth is accelerating. In other words, as the bank describes its “chart of the day”, variability in GDP growth across countries is at the lowest in 50 years, or stated simply, the volatility of the global economy has tumbled to all-time lows.

The chart above has major implications not only for collectors of correlations (maybe market vol is low because economic vol is low or vice versa) but for analysis as well. As BofA’s Shyam Rajan explains, much of the last four years has been spent debating relative growth differentials and policy divergence. This has been apparent not only in the G5, with the US leading its counterparts, but also within EM. This differentiation in growth led to the dominance of two investment philosophies:

(1) on the macro front, FX was in the driver’s seat driving most asset classes and

(2) on the flow side, crossover foreign demand drove domestic bond markets, both government and spread markets (corporates, mbs, high yield etc).

However, with the collapse of cross-economic variability, this shift reverses the above two trends: it moves the global growth trade from FX to rates and dramatically slows crossover foreign demand.

More ominously, with yet another vol collapse and a resulting “coiled spring” mean reversion potential, it also raises the risk of a synchronized rise in bond yields driven both by global central bank expectations and rising term premia.