Ok, so if there’s anything we learned from Sintra, it’s that “tantrum risk” is real.
The apparent permanence of the “state of exception” in which we are now forced to invest and trade has seemingly had the effect of reducing the tantrum threshold.
That is, the longer rates hug the lower bound, the lower is the “tipping point” beyond which equities interpret rising yields as a risk-off signal. Have a look at this scatterplot:
Simply put: if the stock-bond return correlation flips positive in a bond rout, well then stocks fall too. There’s no diversification.
That imperils risk parity and CTAs and anyone else who has enjoyed the benefits of a return correlation that’s generally been negative since the late 90s. For those interested in a comprehensive discussion of this dynamic, please do check out “‘Things Are Starting To Reverse’: Goldman Warns On ‘Shock’ Risk.”
Well in the spirit of keeping this subject front and center in investors’ minds, do consider the following two charts which show, in order, 21-session correlation between the S&P and TLT, and the same for European stocks and bund futs.
Call that “the case of the disappearing diversification.”
Or just call it “rising tantrum risk.”