"Wonky, Lunging" Unwinds Hit Stocks, Bonds, VIX As Systematic Deleveraging Strikes

Where's Vladimir Putin when we need him? Having saved the world yesterday by spiking crude oil with his comments, the return of bond traders today sees a resumption of risk-parity fund deleveraging (as bond-stock correlations neared record highs).

Something had to give...

As RBC's Charlie McElligott warned last week... this equity drawdown is probably a quick blast of systematic deleveraging:

US rate vol again picking-up (with 10s entering a new 'higher' range 1.75 / 1.85) / bear steepening evident with some monster blocks this morning-->as such, we see the same uptick in cross-asset vol we've been experienced over the past 2 months.  Nothing disorderly in equities today (bc the rates move isn’t disorderly either), but mechanical supply it seems is evident from the systematic community...again.

 

Dollar strength (which drives VIX btw), Crude strength and nascent signs of inflation pick-up all conspiring against USTs currently... in addition to THE buyer of USTs moving their “buy zone” to a higher range it seems (or at least letting things “shake out” to find a new level). 

 

As I said last Thursday in the “RBC Big Picture,” when USTs "...sell off in a “leveraged short convexity” world (back on envelop $3.7T of AUM w leverage between risk-parity, risk-control and structured products with vol targeting “dials”), and where cross-asset correlations are forever tied to the same inputs (CB volatility suppression and the level of the US Dollar), you see “wonky” and “lunging” unwinds."  In simpler terms, leveraged allocation strategies which are primarily long ‘low historical volatility assets like USTs (alongside their longs in stocks, commods, EM) have to deleverage on rates breakouts higher.  At times, this can spill-over beyond rates….see every all four “taper tantrums.”

Stocks and bonds are getting slammed...

 

As Risk-Parity funds delever

 

And oil is not helping...

 

With stocks giving up post-FOMC gains...

 

The wedge has broken...

 

And VIX is testing 15...

 

Charts: Bloomberg

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