Risk-Parity Quants Hammered by Stocks and Bonds Moving Together (Rate Volatility Extended Thursday’s Aggressive Bid)

(Bloomberg) — One of the ugliest things about this week’s selloff is that there are so few places to hide, and that’s bad news for a breed of quant which seeks to spread out risk across assets. When Treasuries and stocks move together, …

So-called risk-parity strategies posted their worst day in four months on Thursday, according to an S&P index, while the $1.2 billion RPAR Risk Parity ETF plunged the most since the depths of the Covid rout in March.

The investing style made famous by Ray Dalio allocates money across assets based on their volatility, so can struggle when things go haywire together. Thursday saw the S&P 500 slump 2.5% as benchmark U.S. Treasuries tumbled, the latest in a series of co-movements that have taken the 60-day correlation between their futures to the highest since 2016.

U.S. rates volatility has slightly extended Thursday’s aggressive bid during U.S. morning, led by belly of vol surface, with focus on Fed’s policy path also driving eurodollar spread flows. Barclays recommended long position in 3-year Treasuries based on market pricing of Fed hikes inconsistent with Fed’s flexible average inflation targeting framework.
ATM 3m10y swaption added ~1bp to 86.5, slightly exceeding Thursday’s high; with volatility intensifying around the belly, spread between 3m5y/3m2y remains at levels last seen in early 2014.

The led belly of the beast.

Lead belly? Good night Irene.