With the Fed set to issue its policy statement in short order, we will limit our pontifications and prognostications on what they will or will not do in this note, as we may be proven wrong, also in short order. While the Fed meeting will always have market moving implications, the upcoming referendum in the UK has had a greater Impact on the market’s psyche recently. The market’s overall tone has become increasingly risk adverse as the polls have tightened over the past week. In what has become a familiar move, the lack of high quality liquid assets has pushed the yields of the largest, safest sovereign bonds to levels last seen several years ago, if not to historical lows. From the perspective of treasuries, the current level of the 10y below 1.6% was last seen regularly in 2012 when the market was anticipating the beginning of QE3. While treasuries are plumbing the all-time lows, they are downright generous compared to Bunds curve, which moved into negative territory out to the 10y maturity for the first time. Investors have been nonetheless choosy in the definition of high quality assets, with the spreads between bunds and peripheral debt widening out by 15% since the beginning of the month. Volatility has widened out since the beginning of the month, with most of these wider prices swings occurring over the past week. Equity and fixed income volatility, as measured by the VIX and the Move index, generally stand at levels comparable to the volatility at the begnning of the year. FX volatility is showing a similar pattern, with volatility in EM currencies back to February/March levels, while G7 currency volatility stands at levels last seen in 2011.
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