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Welcome To ‘The Age Of Fragility’

Enjoy your stay.

We all know the story by the now. Years of central bank accommodation has driven investors down the quality ladder in search of yield, leaving everything priced to perfection and the hope is that the eventual unwind of stimulus will be benign as policymakers stick the proverbial dismount with predictable forward guidance, gradual tapering/balance sheet rundown and rate hikes that only proceed with the market's implicit consent. Forward guidance is set to take the baton from asset purchases as the go-to mechanism for implicit central bank vol. selling and to the extent policymakers remain adept at calibrating expectations to align with the evolution of the normalization effort, the ubiquitous short vol. trade in all its various manifestations will remain viable or at least not implode in dramatic fashion. Exogenous shocks have the potential to derail that effort - to upset the tedious balance. Trade wars could stoke inflation, ill-timed fiscal stimulus could complicate the reaction function, etc. Meanwhile, the distortions wrought by QE and accommodation more generally have made markets fragile. The JGB market, for instance, effectively no longer functions. Relentless spread com
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