Let’s talk about complacent credit markets again.
See the thing is, you’re too focused on volatility (or a lack thereof) in equities and because of that, you’re missing out on where the action really isn’t (get it?).
Credit, as we’ve noted extensively, is passed completely out and that’s really not too surprising considering voracious ECB buying (you’re reminded they’re not really tapering CSPP or at least they haven’t been lately) and the simple assumption that as long as the central bank bid remains squarely in place, decompression trades look like a fool’s errand.
Indeed, the complacency in credit has become so ubiquitous that respondents to BofAML’s most recent credit investor survey now believe the only real risk for credit is that both IG and HY are in bubble territory:
Well for those interested in just how batshit crazy this has become, we present the following brief color out Thursday evening from Goldman..
Bottom percentile rank: Where implied vol is.
While the collapse of the VIX to multi-decade lows has garnered headlines recently, implied volatilities on US and European credit indices have quietly reached new lows as well. The one-month at-the-money implied volatilities on US and European credit indices have all collapsed to their tightest levels since 2008 (Exhibit 6).
The same pattern prevailed for realized volatility. In the US, the 1-month realized volatilities on the CDX IG and HY indices now stand at their 21st and 7th percentiles, respectively, while in Europe, the realized volatilities on the iTraxx Main and Xover declined to their 10th and 5th percentile ranks, respectively.
At current levels, the volatility premium on macro indices, the difference between implied and realized volatility, is at depressed levels similar to those reached in mid-2014 prior to the onset of the New Oil Order. While the catalysts that could move volatility higher are always difficult to identify and time, these ultra-low volatility levels provide attractive entry points, particularly given the solid performance of the IG and HY markets year to date.