With stocks climbing and credit spreads settling at recent tights, all talk in primary markets is of “using the window” before political volatility re-emerges. But all of these reckonings fixate on “calendar risk” — or the notion that volatility will be considerate to keep itself to neatly defined occasions, such as Dutch or French elections. In 2016 these flashpoints were short-lived and mostly confined to FX and other sensitive assets.
Record low volatility is an easy story to sell using this narrative, which explains a market-wide lack of near term hedging. Why hedge against volatility — and bleed the carry costs — when it would take a surprise out of left field to rock the market?
The unpalatable answer is that, for the US, complacency has usurped uncertainty. Every day of the Donald Trump presidency is a roll of the dice. It will be a miracle if he gets through his first month without roiling the markets. Left field is surely nailed on.
Against an administration keen on "alternative facts", bleeding carry looks ravishingly attractive, especially when the cost of hedging is so cheap. With the VIX below 11% and the credit volatility smile so accentuated as to look deranged, there has never has been a better time to get it wrong. And getting it right will bring the added joy of watching as everyone else runs around in panic.