The template for a disorderly bond market rout in loose policy surroundings was provided by the Bund VaR shock last spring, whereby higher yields disrupt complacent EM longs and force sharp spikes in EUR- and JPY-EM crosses.

We are hedging this risk directly via cheap EUR/INR 1Y vega longs, but it is fair to assume that a pan-G3 rate shock will prove as destabilizing for USD/high-beta pairs as their crosses, hence, the former deserves vol allocation even if the epicenter of stress may lie outside of Washington.

At a micro level, the lion’s share of the stasis in low volume summer markets now appears fully reflected in low implied vol and skew levels.

The realized vols are still soft and below implieds (see above chart), but interestingly, nearly half of the USD/ (G10 + EM) universe has now started to experience positive realized vol momentum. This could be nothing more than technical position jostling in the run in to a busy September, but is still a visible turnaround from the torpor of the past two months and is an informative bottom-up performance indicator worth watching.

Relatively, back-end (1Y) ATM vols, which respond to real option demand/supply dynamics rather than micro event related day weight changes, have ticked higher between 0.1 – 0.5 vols across most major currencies over the past two weeks despite a lack of clear-cut catalysts (other than the idiosyncratic South African political turmoil), pointing to investor interest in pre-positioning for a busy Q4.