GOLDILOCKS AND THE


THREE BEARS


As 2018 got under way, it initially appeared that investors continue to adopt a path of least resistance ‘Goldilocks’ approach to asset allocation, reaching for yield and/or risk assets, and seemingly impervious to any suggestion that the new year might usher in a more challenging environment.


To a certain extent, this looked to be something of a learnt response, i.e.  credit yields and a concomitant setback for risk assets as the Fed raised and continues to hike rates as a consequence has been something  returning to typical levels – and year after year this has proved to be something of a so-called ‘pain trade’. Per se one might borrow from Dr Strangelove and term this: ‘how I learned to stop worryi ng and love the Goldilocks scenario’.


It would indeed be rather churlish to suggest that the 80 bps rise in 10  bps in H2 2016 and indeed 140 bps during the H2 2013 ‘taper tantrum’.  and those prior incidents, and that is that credit spreads widened (to varying degrees), whereas they are currently tighter than at the start of 2017. It should be added that the 2013 and 2016 moves had one or more incidents of near vertical moves over a period of days or a week. By contrast the current shift higher has been far more insidious and attritional, or in other words much less volatile, which could prove to be  general terms, it can be safely observed that ‘crash, bang, wallop’ moves in asset prices or exchange rates may prompt many quips about ‘do you want to catch a falling knife?’ But very frequently these also prove to have been a last hoorah for the bears. By contrast attritional moves can often engender a false sense of security, prompting investors to add  losses at a later date.


In the case of bond and credit markets, this can lead to a ‘duration trap’, which has some similarities to ‘convexity selling’ in US MBS, which so 


4 | ADMISI - The Ghost In The Machine | January/February 2018


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