(Still) The Most Underappreciated Tail Risk
Towards the end of "Where Were You When The World Didn’t End?", I reminded folks that although 2020 has so far been defined by bonds' stubborn unwillingness to selloff, one of the biggest tail risks out there remains a sudden resurgence of inflation and a concurrent disorderly bear steepener.
That outcome seems wholly far-fetched at the current juncture. The Fed and the ECB are engaged in wholesale rethinks of their policy frameworks in an effort to figure out how to counter structural disinf
I think Wuhan’s rapid spread and communicability (much worse than SARS) will accelerate and exacerbate its economic impact, and we’ll soon be longing for the days when the economy (and markets) looked great and inflation was a credible risk. (Go ahead, call me an unenlightened underappreciator…)
I suppose that refi or credit default risk in corporate bonds could suddenly start making radar screens, as surprise interruptions to revenue streams, growth plans, and global trade flows could toss random hand grenades into bond values for various companies. Bond/equity negative correlations could still fail at least in that chunk of the market, if fear became sufficiently widespread.
Pension fund nightmare.
Already public pension funds do not look great after massive rallies in everything. Imagine what they will look like if this happens.
Awful time having to run a pension fund.
Sorry B of A, by this time next year you will probably be praying for some inflation….. Soc Gen is closer to the mark- this economic cycle is long in the tooth and we seem to be suffering from both tail risks and garden variety ones too…. inflation might be a problem down the road but I would not bet on it for the next couple of years….