Analyzing Market Volatility

Everyone talks about the swap spread, few explain it. An explainer on how it works and what is says about (il)liquidity. Swap spread = Interest rate swap rate minus (same tenor) US Treasury bond yield Swap spreads should be positive because: a) Treasuries are risk-free b) Swaps have counterparty credit risk (banks offer these swaps, so bank's credit risk) c) Treasuries are more liquid Example: 10yr swap rate: 4.12% 10yr UST yield: 4.18% Swap spread = 4.12% – 4.18% = -0.06% What is a swap? Interest rate swap (IRS) is a contract between 2 parties to exchange cash flows based on different interest rates - Party A pays a fixed interest rate - Party B pays floating interest rate Notional principal is not exchanged, only difference in interest payments. Swap receiver of fixed rate emulates buying a bond Swap pros + Swaps don’t require actual cash investment upfront + Swaps don’t tie up capital (just collateral/margin) and therefore offer leverage Swap cons - Counterparty risk - lower liquidity than bonds - Valuation sensitivity Why would swap spread turn negative? a) Investors are more willing to receive fixed payments in a swap than to hold a Treasury b) Treasuries are sold off (yields ⬆️) c) Swap demand is high because rates are falling If Treasuries are being heavily sold (to meet margin calls) and yields are ⬆️more than swap rates, means: 1. Dealers are not stepping in to buy Treasuries 2. Treasury market has lost depth (forces Fed hand) 3. Regulatory constraints (balance sheet usage) may prevent arbitrage UST are easier to tap liquidity: low price impact/can be repo'd for cash. Swap unwind is harder because swaps aren’t sellable asset (they're contracts) - Selling UST is like selling gold: easy but buyer needs to want it. - Unwinding a Swap is like canceling rental contract: doable but you may owe fees/need to re-negotiate.

Government bonds underperformed equities, credit and commodities in this 3-year risk on market. Our analysis shows when equities sell off, Treasuries are also less diversifying compared to decades prior (chart). What’s happening? Long bond yields are made up of 2 components: ➡️ Policy path - in a world shaped by supply, central banks are more limited in their ability to come to the rescue of the economy without reigniting inflationary pressure. Hence Treasuries are less reliable when equities fall. ➡️ Term premium - it’s driven by bond volatility, inflation uncertainty, and of course fiscal dynamics. Think of it like any other type of risk premium such as equity risk premium it’s about perceived risk and additional required compensation above risk-free for holding it in portfolios. Large deficits record debt and heavy issuance mean that term premia can reprice higher, maybe especially during stress, pushing long yields up even as markets may price a lower policy path. Together, these forces weaken the traditional stock–bond hedge. I think of Treasuries now as quality income assets not the diversifiers they used to be.

Stocks AND bonds have both been moving down over the past few weeks, just like in 2022. We call this the "ziggy problem"❗ But what is the "ziggy problem" of stock-bond correlation? And how can investors avoid the negative returns trap? In 2022, a "balanced" portfolio of stocks and bonds lost value on both the stock side and the bond side. As of Q1 2026, we're seeing a similar story play out. Why does this happen? Aren't bonds supposed to zig when stocks zag? Why are bonds not protecting portfolios right now? It all comes down to INFLATION and expectations for interest rate moves. In times when inflation is a concern for investors (and for central banks), we see positive correlation. Stocks and bonds tend to move together. We've seen this before: 📌 1970s-80s (stagflation)... 📌 2022 (COVID/stimulus causing inflation) ... 📌and now again in Q1 2026 ($100+ oil causing inflation concerns). When inflation is a primary concern, central banks are reluctant to cut interest rates, because adding more liquidity could make the problem worse. So while stocks and economic data are arguing for cuts, inflation is arguing to keep rates unchanged (or even an interest rate hike). The result? We don't see bonds rally when stocks fall. ❓So which investments perform well in this environment? Uncorrelated hard assets - like infrastructure, shipping and real estate. They often have 1️⃣ built-in hedges against inflation risk 2️⃣ they pay a regular return in up and down markets 3️⃣ they are inherently uncorrelated to short-term economic factors. That's why they are among the few asset classes in the GREEN at this point in the year. Are bonds still valuable in portfolios? Of course! If high oil prices start to impact economic growth, then we're looking at recession risks. In this scenario, the Fed and central banks will look to aggressively cut rates, causing bonds to rally. We can't discount this scenario. But we're not there yet. Our outlook is still for economic growth and the bigger concern right now is inflation rather than recession. That's why the combination of hard assets AND bonds are necessary to protect against inflation as well as growth risks. 📊 This chart is on p.64 of our Guide to the Markets and p.6 of our Guide to Alternatives, available at jpmorgan.com/GTA.

A 60/40 portfolio does not deliver a constant risk exposure. That sounds obvious, but most investors still ignore it. From 1994 to 2016, the rolling one-year volatility of a monthly rebalanced 60% S&P 500 / 40% Barclays U.S. Aggregate portfolio ranged from less than 5% to as high as 20%.* That is a huge difference. In some environments, a 60/40 portfolio may be appropriate for a conservative investor. In turbulent markets, the same portfolio may look more appropriate for an aggressive investor with a thick skin and high risk tolerance. As I explain in Beyond Diversification, volatility and exposure to loss are not stable through time. A constant asset allocation does not mean constant risk. That is why risk management has to be dynamic. *Data sources are Ibbotson Associates, Standard & Poor’s, and Barclays. As of 12/31/2016.

🔥 A 20% Drawdown in Japan’s 40Y JGB: A Physician-Investor’s Take on the Silent Shockwave in Asia’s Bond Markets 🔥 From 98 to 75. ✅ That’s a -20% collapse in Japan’s 40-year government bond since June 2024—an eye-watering drop in an asset once synonymous with safety and stability. As a physician, I’m trained to look for early symptoms before full-blown disease sets in. As an investor, I’m seeing red flags across the bond market—and Japan’s life insurers are right at the heart of it. These institutions are heavily invested in ultra-long JGBs to match decades-long policyholder obligations. 👉 But now, with the sharpest selloff in memory and 8 trillion yen in paper losses this quarter alone, even the most conservative portfolios are under stress. It’s not just about math. It’s about macro health. The Bank of Japan now faces a diagnosis with no painless cure: ✅ Raise rates to contain inflation (rice and basics included) ✅ Risk igniting a bond market or banking crisis ✅ Or let the yen slide into a currency collapse 👉 In medicine, we often say: “Treat the cause, not just the symptoms.” 💎 But in monetary policy, the treatments often become the cause. This isn’t just a Japanese crisis—it’s a signal to the rest of Asia, where insurers and pension funds hold massive duration risk. As the tide of easy money recedes, we’re learning—again—that even the safest assets carry hidden fragilities. 🩺 Whether in medicine or markets, systemic resilience comes not from ignoring volatility, but from preparing for it.

For 20 years, investors lived off a gift. When stocks fell, bonds rallied. The “golden relationship” made 60/40 feel bulletproof. But that was luck, not law. In the 1970s and 1980s, stocks and bonds sank together. Bonds didn’t hedge—they hurt. Today feels closer to that world. Inflation shocks, weak policy credibility, and supply risks flip the math. When inflation dominates growth, stocks and bonds move the same way. The chart says it all: if stock–bond correlation shifts from –0.5 to +0.5, portfolio volatility jumps ~20%. Downside risk rises nearly 30%. To hold risk steady, equity allocations would need to be cut—taking return potential down too. Here’s the friction: diversification isn’t free anymore. 60/40 is creaking. Bonds don’t guarantee protection when inflation bites. Commodities, liquid alts, and smarter style exposures matter more. Energy and industrials fight inflation. Utilities and staples don’t. Ignore this, and portfolios carry hidden concentration risk. Bottom line: the golden relationship isn’t dead—but it’s fragile. Fragility isn’t a strategy. Would you cut equity to preserve risk if correlation flips? Do you see commodities as core allocation or just hedge? If bonds fail to hedge equities, what’s the third pillar? How do you stress-test for stocks and bonds both down? For more see our Nomura CIO Corner: https://lnkd.in/e4TCax_g #Diversification #Stocks #Bonds #Alternatives #Commodities #Macro #Nomura #CIO #Markets

A conversation with a retail investor last week reminded me how counterintuitive investing really is. He asked: “If I can handle the risk, why would I ever choose a lower-return asset?” Fair question. I mean, if one strategy offers a 12% expected return and another offers 6%, why pick the 6% one? Bigger return = better option, right? Not necessarily. What matters is not just the headline return, but also how efficiently that return is generated. Take two strategies: • Strategy A: 12% return, 18% volatility • Strategy B: 6% return, 6% volatility At first glance, A wins. But B only takes one-third of the risk. That means you could hold 3x as much of B and still take the same total risk as A. Now the comparison becomes: • A = 12% return at 18% risk • 3x B = 18% return at 18% risk Same risk. Higher expected return. Now we’re finally comparing apples to apples. That’s the core idea behind risk-adjusted returns, and why professional investors focus so much on the Sharpe ratio: return per unit of risk. Of course, I’m simplifying. Volatility isn’t the full picture of risk, leverage isn’t free, and historical Sharpes don’t hold perfectly going forward. Still, it has big implications: • 100% equities may not be the most efficient portfolio - even if your goal is high returns • Portfolio construction and position sizing matter at least as much as asset selection alone • Diversification is not just about reducing risk - it can improve returns too • Return and risk are linked, but they are not the same decision: choosing the most efficient portfolio first, then sizing it to the risk you actually want, may be better than simply selecting the asset with the highest expected return • Leverage is not automatically more risky than concentration - a modestly levered diversified portfolio can be less risky than an unlevered concentrated one And maybe a more actionable takeaway for retail investors: Spend less time asking which asset has the highest expected return, and more time asking how each asset changes the risk and efficiency of the overall portfolio. #assetallocation #portfoliomanagement #portfolioconstruction #retailinvestors

The Equity / Bond Correlation Puzzle The correlation between equity and bond returns has been negative since the late 1990s. This has helped money managers achieve relatively stable returns (i.e. high sharpe ratios) especially in balanced or multi asset strategies. However, this correlation turned positive in 2021/2022 simultaneously with the rise in consumer prices (aka inflation). The common economic rationale is that in an inflationary environment central bank actions are fundamentally different than in a deflationary or low-inflation environment as central banks have to focus more on price stability and less on economic stability. This means higher interest rates which are (intentionally) a burden on economic growth. So generally: higher interest rates + lower growth = lower equity prices (and lower inflation). As usual, in practice things are not that simple. The 1970s were a high inflation, high interest rates, and positive correlation period. After inflation cooled off sharply and interest rates have been falling in the early 1980s, it took almost a decade for the equity / bond correlation to start falling. It actually went negative at the end of the 1990s, roughly at the time when core inflation fell below 2%. Psychological and behavioural effects (anchoring) are probably responsible for the late adjustment. Currently inflation dynamics are cooling and interest rate cuts are on the table. If we really go back to a sustainable low inflation environment, I would expect a relatively quick return to a negative equity / bond correlation regime as this is probably still seen as "normal" unlike in the 1970s. The recent equity market correction also hinted in that direction. But only time will tell if we have already seen the peak in inflation or if there might be a second wave like in the 1970s. The probability of the latter is not zero, given the geopolitical and social tensions around the globe. #investing #correlation #equities #bonds

Naftogaz of Ukraine has announced plans to start importing natural gas beginning in February. This follows an earlier purchase—estimated at 92 million cubic meters of imported gas —made in December by its storage subsidiary, Ukrtransgas (the storage operator). This strategy raises questions, as Naftogaz could have capitalized on lower prices at European hubs during the spring-summer period of 2024. I suspect the company has now realized their storage levels might be insufficient, especially with winter still in full swing. Even if current reserves can carry Ukraine through the cold season, the country will likely emerge with substantially depleted gas stocks. To prepare for the next heating season (2025–26), Ukraine may need to import up to 3 bcm of gas. Local production simply isn’t enough to meet domestic demand—experts forecast a 2.69 bcm shortfall in 2025 alone. In previous years, this deficit was covered by storage withdrawals and imports; however, with storage levels heading toward record lows, the need for additional imports will be even more pressing. The question now is whether Naftogaz can secure timely and affordable supplies to avoid potential energy shortages and further price volatility. The next few months will be critical in defining Ukraine’s energy security and market stability in 2025.

Ukraine continues to demonstrate strong fiscal discipline, maintaining overall financial stability and ensuring that priority expenditures are delivered in full and on time. A key factor underpinning this stability is the consistent support of international partners, complemented by robust demand for domestic government bonds. In November 2025, Ukraine secured $7.9 billion in donor assistance. The European Union provided the largest share, including €4.1 billion in ERA loans and €1.8 billion under the Ukraine Facility. Domestic borrowing remains an important source of budgetary support. In November, the issuance of domestic government bonds attracted nearly $1 billion, with demand from Ukrainian citizens and businesses continuing to rise. Investments by legal entities and individuals were 29.9% higher than in November of last year. In total, over the first 11 months of 2025, Ukraine has mobilized $58.5 billion through international partner support and government bonds issuance.