Market volatility has not quelled the appetite for risk, with subprime mortgages back in demand
Nicholas Spiro says the robust demand for products that led to the 2008 financial crisis indicates that market sentiment remains confident, despite the recent turbulence
The benchmark S&P 500 index, which in the first three weeks of this year shot up 6.5 per cent following a 20 per cent surge in 2017, finished the first quarter of this year in negative territory – its first quarterly loss since 2015. According to Bloomberg, the index has moved more than 1 per cent in either direction 22 times this year, three times the figure for the whole of 2017. Other equity markets, including those of Germany and Japan, are also in the red.
Other products tarnished by the financial crisis are also back in fashion.
This is buoying demand for debt with ultra-long maturities. Sales of “century bonds” have taken place in Austria, Belgium and Ireland as investors seek extra yield. Companies and institutions, including Oxford University, have also issued bonds that will not mature for 50 or 100 years.
If investors are still willing to plough money into crisis-era US subprime mortgages, exotic frontier debt and long-dated bonds which will not be redeemed until way beyond most investors’ lifetimes, then how much more dangerous and volatile can markets really be?
The fact that investors still have a voracious appetite for risky assets shows that the recent bout of turbulence, although a clear sign that the low-volatility environment of the past two years has come to an end, is not perceived as a regime change for markets.
The signals from debt markets, particularly over the past few months, suggest that investors believe yields are likely to remain at historically low levels because of subdued inflation and the determination on the part of the major central banks, especially the European Central Bank, to withdraw stimulus in a well-telegraphed and gradual manner.
This presupposes that central banks can unwind their ultra-loose policies in a more or less orderly manner – an assumption fraught with considerable risk, to say the least.
Still, if even tarnished subprime mortgages are in demand, market sentiment must be holding up extremely well.
Nicholas Spiro is a partner at Lauressa Advisory