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Repeats Story Initially Transmitted at 16:00 GMT Sep 17/12:00 EST Sep 17
--Low Vol 'Normal' For EQs, 'Unusual' for FI During Tightening Times
--EQs Vulnerable To Bond 'Snapback' Should 'Term Premia' Return To Normal
By Vicki Schmelzer
     NEW YORK (MNI) - Despite occasional spikes, risk gauges overall in the
latest quarter pointed to  low volatility, in some cases surprisingly low, even
though global central banks were tightening and or moving towards monetary
policy normalization, according the Bank for International Settlement's
Quarterly Review, released Sunday.
     In the case of the CBOE's volatility index or VIX, "low stock market
volatility has been typical of monetary tightening cycles since the early
1990s," the BIS said. 
     "During such episodes, both the VIX and 30-day realized stock market
volatility have tended to stand between half and one standard deviation below
their long-run average," the Review said. 
     This trend may be because volatility is often low when stock markets are
rising and central bank tightening tends to occur when equity markets are
     "When set against this benchmark, the average VIX in the last 90 days prior
to 5 September was not so unusual," the BIS said. 
     In contrast, the Merrill Lynch Option Volatility Estimate Index or MOVE
index, "has been unusually depressed in recent months, despite the increase in
the fed funds target rate in June," the Review said. 
     The trend of the MOVE index lately was unlike prior tightening episodes,
"during which bond market-implied volatility was close its long-term average,"
the BIS said. 
     "Low volatility is normal for equities, but unusual for bonds in tightening
episodes," the Review said. 
     Against this low volatility/"risk on" background, equity market investors
"employed record of margin debt to lever up their investments."
     "In fact, margin debt outstanding was substantially higher than during the
dotcom boom and around 10% higher than its previous peak in 2015," the BIS said.
     While rising margin debt and price to earnings (P/E) ratios suggested that
stock valuations might be "stretched," still "unusually low bond yields" implied
that "valuations may not be out of line when viewed through the lens of dividend
discount models."
     Indeed, "estimates of bond yield term premia remained unusually compressed,
well below historical averages in the United States and drifting further into
negative territory in the euro area," the BIS said. 
     "This suggests that equity markets continue to be vulnerable to the risk of
a snapback in bond markets, should term premia return to more normal levels,"
the review said.
     In a media briefing accompanying the BIS Quarterly Review, Claudio Borio,
Head of the Monetary and Economic Department at the BIS, weighed in on the topic
of inflation, which has been elusive globally. 
     "Why has inflation remained so stubbornly low despite economies approaching
or surpassing estimates of full employment and unprecedented central bank
efforts to push it up?" he said. 
     "This is the trillion dollar question that will define the global economy's
path in the years ahead and determine, in all probability, the future of current
policy frameworks. Worryingly, no one really knows the answer," Borio said. 
     The link to the BIS Quarterly Review:
--MNI New York Bureau; tel: +1 212-669-6438; email:

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