Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

Volatility- signals FT's Lex

Markets
http://www.ft.com/cms/s/3/6f2d3774-0766-11df-a9b7-00144feabdc0.html?nclick_check=1
Last updated: January 22 2010 20:07

If the first 22 days of 2010 are anything to go by, investing is going to be an edgy affair this year. Sure, the financial crisis was terrifying. But for the past 10 months or so there was fun to be had and profits to be made by taking on risk once again. Confidence was returning. Recently, however, investors seem to be losing their nerve.

With the exception of Japan – supported by a weaker yen – all major equity markets are down year-to-date. Even glamour boys such as Brazil and China are 5 per cent off. Companies seem equally anxious. European investment grade corporates have raised €65bn this year, according to Bloomberg data, half the issuance compared with the same period last year. True, junk bonds have been flying off the shelves. But the anxious mood is reflected in the Vix index, a much-watched measure during the credit crisis that tracks the implied volatility of S&P?500 options. It has leapt by a quarter in two weeks.

Just as many had written them off, investors are also piling into the relative safety of government bonds. In spite of near record levels of US Treasury issuance, for example, ratios comparing the number of bids with securities offered are at levels not seen since September. The near-record difference between two-year and 10-year bond yields of 2.9 per cent early last week has narrowed more than 10 basis points. In other words the steep yield curve, a sign of recovery, is now flattening.

Why is everyone so spooked? Three things are to blame. First, the Obama bank levy and Volcker plan have upped the ante regarding regulatory risk in investors’ minds. Second, China’s crackdown on bank lending is tempering global growth expectations. Finally, Greece’s problems are a reminder of growing sovereign risk. As an old investment saying goes: greed is fleeting, fear is permanent.