Last updated: 10:47 / Tuesday, 21 April 2015
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Central Banks Have Distorted Reality in the Volatility Market

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Central Banks Have Distorted Reality in the Volatility Market

The major impact of Central Banks actions all over the world has been a massive decrease of interest rates. This rates move has led to very good performances for bond investors, but reduced their potential of future returns. As a consequence, investors started to look for alternative yields, for example by allocating more risk to Equities, but also by selling volatility to extract the volatility risk premium and generate yield.

This is where Central Banks have distorted reality in the volatility market: volatility has become abnormally low and abnormally stable compared to the uncertainty over global recovery.

The consequence for the volatility market is that is at some point there is uncertainty regarding Central Banks (Tapering talks in June 2013 or more recently Fed Rates hike talks, or ECB QE), volatility can spike quite sharply, like we experienced in October 2014.

As Central Banks in general around the world will stay very accommodative in 2015, we at Seeyond expect volatility to stay artificially low in average, ie lower than where it would be otherwise, but with some key periods ahead (Fed rates hike, ECB QE effects, etc) we expect to see volatility short lived spikes few times in the coming year.

Simon Aninat, portfolio manager at Seeyond, subsidiary of Natixis Global AM.

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