Risk Taking Returns: The VIX, The Carry and Junk Spreads

A number of the market based measures of risk taking that I follow have showed strong moves over the course of the 2 month rally we’re now experiencing.

The guys at BeSpoke Investment have a chart showing that spreads between high yield corporate debt and treasuries have come down about 20%.

(Explanation: What that means is that prices for junk bonds are going up i.e. demand for junk bonds is increasing.  That means that investors are more interested and willing to buy and hold risky debt).

The Volatility Index (VIX), known as the “fear gauge”, which measures implied volatility from options prices has fallen dramatically (Chart).

(Explanation: What this means is that put option prices i.e. the prices for betting on a market fall or protecting against one, have fallen which means that investors are not expecting a big fall and are not willing to pay up to bet on one or buy insurance).

And the carry trade seems to be back on as the dollar has rallied strongly against the Yen (Chart).

(Explanation: The carry trade is where investors borrow in a low interest rate currency, the Yen is the primary one, convert those Yen to another, higher yielding currency, and invest the money into assets denominated in that other currency.  When the dollar rises relative to the Yen like this, it means that investors are borrowing Yen and converting them into dollars in order to invest in US assets).