When it comes to rates in 2023, analysts at Deutsche Bank AG (NYSE:DB) have forecast the potential resolution of uncertainties and lower volatility.
In a rates special report on the 2023 year ahead outlook, analysts wrote that the appearance of high volatility was the most prominent anomaly in the rates manifold this year.
They noted that this was a function of several factors: the distribution of underlying uncertainties reflecting the structural breaks in traditional economic relations; the forcing of monetary policy to operate on an unknown terrain, and market unpreparedness or reluctance to fully accept it.
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“Resolution of one or more of these factors is likely to lead to a turnaround in volatility,” they wrote.
The bank's analysts noted that the persistence of high volatility was a reminder that these times were different from anything experienced in the past, where tightening cycles were generally periods of decelerated growth characterized by compression of risk premia and general risk-on sentiment.
“In contrast, since the beginning of rate hikes this year, risk assets have faced challenging conditions and volatility has risen to crisis levels, significantly higher than in any other cycle the last three decades,” they wrote.
Feds to remain hawkish
Looking at volatility decline beyond 2022, the analysts noted that if the economy was indeed heading for a soft landing, this was likely to be more supportive for volatility as the Federal Reserve will remain hawkish and not cut rates too fast and by too much.
“In this case, both short- and long-tenor volatility would settle not far from each other,” they wrote.
“If a hard landing and a deep recession, however, then it would end up being bearish for volatility if it requires aggressive rate cuts and a protracted period of recovery.”
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