I am the one who knocks

This Is What Happens To Stocks In A “VaR” Shock

in Credit/Debt/Equities by

We’ve talked here and elsewhere about the effect a rise in rates would have for bond investors who have continually frontrun the perpetual central bank bid.

Now, the market is beginning to get a bit jumpy as UST yields rise on fears that Japan will move next week to steepen the curve.

Well, thanks to Citi we know what has happened to equities historically speaking when it comes to “shock” rises in UST rates. As you can see from the following, a slow move higher is fine, especially if it’s interpreted as a sign of economic strength. However, a dramatic move to the upside is almost always associated with equity weakness. Which means, in a VaR shock, there’s the distinct possibility that everything’s move in the “wrong” direction at once.

var5

(Chart: Citi)

In that scenario, you don’t want be anywhere near emerging markets (hopefully we didn’t need to tell you that) and probably the only safe haven you’ll have is the greenback. So watch those long-end yields and make sure to parse Kuroda next week. What he says (or doesn’t say) might be more important than Yellen’s yellin’ – so to speak.

2 Comments

  1. Re: What happens in a VaR Shock.
    Thank you for being absolutely clear. And, yes, you did have to say steer clear of Emerging Markets! Last time the warning was too cryptic for this old man. I had a vert. spread on TLT last week that was set in the wrong direction because of the bad chatter on Seekin’Alfa. Luckily, I recovered a pile in QQQ. Win some , lose some….Thx, Mark

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