Here Are The Two Things Investors Would Find "Most And Least Surprising" In 12 Months

For the second consecutive month, BofA's credit clients responded that there is one thing they find to be the biggest market risk: "quantitative failure", which is also a euphemism for central banks losing control of the bubble they have been inflating for the past 9 years. It's a relatively novel fear, replacing "bubbles in credit" (i.e., not the deflation but inflation part) and "populism" in recent months, although we have a sense that populism may be right back up there very soon.

As BofA's Barnaby Martin puts it, "the big concern remains Quantitative Failure – the idea that markets could fret next year because so much QE has delivered so little inflation. And yet a similar proportion fear the opposite – that the persistence of central bank looseness will simply drive credit bubbles down the line."

Looking at the list of answers, at the top of the Wall of Worry for high grade investors are: “Quantitative Failure”, “bubbles in credit” and “geopolitical conflict”. “Rising yields” is much less of a concern (down to 5% from 14% in August). Interestingly, almost no investor seemed to worry now about “Brexit”, “populism” or “low liquidity." Which confirms that the poll was taken before this weekend's Catalan referendum, which at the current rate, is on pace to tear apart Spain, and potentially the EU, perhaps as soon as next Monday.

However, the most informative part of the monthly survey is not what most investors perceive as the biggest risk - as a black swan by definition can not be "predicted" - but rather what events would be seen as most and least surprising over the next 12 months: the data is informative because even assuming it is totally wrong, one still has both extremes of the spectrum to work with. Incidentally, this month on a net basis, most IG investors see that inflation will be the most surprising over the next 12 months. At the same time, the least surprising development would be higher volatility and credit “bubbles”, which considering both VIX and IG spreads just traded near record lows, appears a little confusing as credit investors say they wouldn't be at all surprised by a market crash. 

it would be ironic if there was, in fact, a surge in vol and contrary to this poll, complacency was so pervasive that everyone blew up...

Meanwhile, high yield investors we see broadly the same picture. The least surprising development would be higher volatility and credit “bubbles”. The most surprising development would be a Eurozone breakup.