Risk Aversion Index

The RAI fell in August and stayed on a “High Risk” signal. We remain cautious and recommend higher quality within fixed income.

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The RAI fell in July and stayed on a “High Risk” signal. We remain cautious and recommend higher quality within fixed income.

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The RAI rose again in June and stays on a “High Risk” signal. June saw an acute case of carry trade reversal; we remain cautious and recommend higher quality within fixed income.

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The RAI rose in May and stays on a “High Risk” signal. We remain cautious and recommend higher quality within fixed income.

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We’re downplaying the new signal’s significance and remain cautiously optimistic towards risky assets near term. Our biggest concern is that a rise is extremely likely going forward. 

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We think interest rates will stay low for an extended period of time, so the key question is, when will rates start rising?

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This new “Higher Risk” signal closed out the previous “Lower Risk” signal generated last December, and this measure is telling us it’s time to play a little defense.

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In the near term, U.S. interest rates are expected to be range-bound, and we remain neutral on the U.S. yield curve. Bond Market Risk Aversion Index fell again in January, and remains on a “lower risk” signal.

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Bond Market Risk Aversion Index fell in December, resulting in a new “lower risk” signal that closed out the “higher risk” signal which occurred back in May. We are now cautiously optimistic.

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The Risk Aversion Index edged up during November. It is still on a “higher risk” signal. We will stay defensive and be patient. Higher quality assets within the fixed income space are favored.

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The Risk Aversion Index fell sharply during October. Despite the sharp drop in the index, it has not fallen enough to generate a new “lower risk” signal. Our take on the current reading  is “wait and see” with a bias towards lower risk.

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A Risk Contagion is now underway, and we continue to stay defensive and favor higher quality assets within the fixed income space. A silver lining: When the Risk Aversion Index moves above 1, odds start to favor a decrease in risk aversion going forward. The bulk of the move is probably done.

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As we expected, the U.S. downgrade was digested by the market fairly quickly and attention turned to the economy. This is a bear market in confidence, more than anything else.

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U.S. likely averted worst-case scenario of default, but credit rating downgrade is still likely. Main impact of downgrade is not the increase in interest rates itself, but rather the liquidity risk in all markets that involve treasury securities as collateral.

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The Monthly Risk Aversion Index edged down slightly in June, pausing for a clearer direction. The biggest contributors of risk are commodities and credit spreads.

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Risk Aversion Index accelerated in May, making it prudent to favor defensive assets near term. Expect small and gradual increase in long term interest rates.

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An orderly decline of the dollar is not necessarily a big concern. On the other hand, a sudden collapse of the dollar, in conjunction with spiking U.S. interest rates, would be a terrible thing. So far this has not been the case.

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This month’s “Inside The Bond Market” presents our new “Risk Aversion Index,” which was developed by Chun Wang to respond to those factors that the bond market is truly worrying about. The Index examines ten factors on a monthly basis to help best position a bond portfolio.

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