Lessons From Japan – Low Yields For Longer But Tail Risk Wider

- "Yield has been trending lower but the decline in implied vol is even more pronounced. As a result, the quality of carry (expected returns divided by implied vol) remains at very attractive levels."
- "We see a problem with tail risk. Implied vol tends to be more expensive vs future realized vols but it performs miserably when it comes to anticipating digital jumps or regime breaks."
- Conclusion – "We will buy duration on dips but look for cheap ways to own tail risk. In particular, we like buying OTM strangle or owning structures such as the progressive income locker."

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