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Are Markets Overestimating Right-Tail Risk?
It's been all right-tail and no left- in recent weeks, according to option-implied, three-month ahead probabilities for benchmark US bonds.
On one hand, this isn't an entirely new development. Left-tail odds diminished steadily since March's mini-banking crisis came and went without a catastrophe.
But some of that was the market pricing out any chance of yields dropping below 3% in the near-term. More recently, where that means since the September FOMC meeting, the option-implied probability o
from Covid time (a dataless opinion) … overshoots are bigger and accelerate faster … blame AI, or FED, or … but market behavior has seemed to shift in levels (overshoot) and timeframes (accelerated velocity). How much change do we investors need to make in our analysis and inferences to keep up with market behavior? Imho, time to review our models deeply- They seem broken or at least wobbly
I bought long term bonds, I hope you’re happy.