Debt ceiling should prompt some volatility in future: UBS

The volatility index (VIX) is at a historical low despite all the tail risks still being there in the system. In an interview to CNBC-TV18, Stephane Deo, Global Head of Asset Allocation at UBS said that VIX is a short-term indicator of volatility and it is to some extent sending the wrong signal.

Also read: Falling Italian bonds yields justified: Finance Minister According to him the VIX is not telling a massively different story from the fundamentals. Deo was surprised that the volatility is not increasing as the debt ceiling should prompt some volatility in the near future. Below is the edited transcript of his interview to CNBC-TV18 Q: You have written a report on why the VIX is so low and what do you see going forward. Can you tell us what the crux of the report is? A: The first part of the report is very agreeing, there is a lot of volatility potentially coming from the political side from Europe and US. Still the VIX is trading at 13 right now across to 13 which is a five-year low. There are two reasons for that. If one looks at the realized goal, the actual goal in the market has been very low. So, the VIX is not telling us a story which is massively different from the fundamentals. The second reason is the VIX is a short-term indicator of volatility. If one goes further in the curve, one should look at long-term volatility, which is much more expensive. So, the bottom line is, if one wants to buy protection, it is cheap. However, one gets protection only for one month. If one wants to get a long-term protection, like six months, it is quite expensive. The VIX is to some extent sending the wrong signal. It is a very short part of the curve that one is looking at. Q: Is the market saying that until mid February we are unlikely to see volatility but as the debt negotiation progress into February and March we might see it? A: We are short volatility for the time being in our asset allocation because long-term volatility is very expensive. The value of the contract goes down so you get paid for that. This has been the case for the past six months. I am surprised that the volatility is not increasing because the debt ceiling should prompt some volatility in the near future. However, this will happen. So, from my point of view there is an opportunity here for investor.