The VP Research Blog
A blog about financial markets and the VP investing framework
There’s Something About the Term Premium
Historically, investors have required extra yield to hold longer-term bonds instead of short-term securities to compensate them for the added uncertainty. Thus, in a “normal” world, term premium (TP) should not be persistently negative. Yet, since 2016, TP has been...
FX Vol Still Attractive
Since news of coronavirus first spread, markets have struck a decisively risk-off tone with higher yielding currencies selling-off. Commodity currencies and Asian markets have been particularly hard hit. Despite the fresh bout of FX weakness, implied vol has been...
Another Yield Curve Red Herring
After first inverting last year, the 3m10y yield curve recently re-inverted, prompting the usual slew of mechanical recession predictions. However, not all inversions are equal. The top-left chart shows that almost all of the YTD decline in 10y yields is from the fall...
Surge in EGB Issuance May Result in Lower 2H20 Supply
January is typically a very busy month for European sovereign issuance as national treasuries kick off their annual funding programmes. This year has seen a marked uptick in supply relative to the previous year as issuers have taken advantage of low borrowing costs to...
Hedge Tail Risks on Low FX Vol
Implied volatility across asset classes has receded in recent months as the barrage of global systemic risks (US-China trade war, disorderly Brexit and the manufacturing slowdown) has dissipated. Even though FX vol, along with other asset volatilities, remained...
Neutral on Industrial Commodities Despite Low Inventories
There has been much commentary pointing out low inventories for industrial commodities and the potential for a squeeze higher in prices. Inventories are indeed very low (as shown in the top left chart using LME warehouse data) but this seems to have been a persistent...
ISM key for US economy, not Iran
Only a few weeks ago, top-of-mind risk for market participants was the trade war, according to BAML’s Global Fund Manager Survey. Now it is highly likely the list would be topped by tensions in the Middle East after the US assassination of the Iranian general, Qasem...
UK optimism has room to run
Weak sentiment and rising leading indicators combined with a supportive central bank is the best combination for asset markets. Sentiment towards the UK has been dismal, but with the ruling Conservative party’s much larger than expected victory at the General...
Autos will lag other rate-sensitive sectors
The auto and housing sectors are two parts of the economy that are highly sensitive to interest rate changes. In light of the Fed’s dovish pivot at the start of the year, culminating in 3x25bps of interest rate cuts, we would expect activity in both sectors to surge....
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