Tail Risk Worries Jump in May

Over half of the tail risk that fund managers see this month is credit related (according to The Merrill Lynch Global Fund Manager survey in May). The greatest black swan concerns are related to a Chinese Credit Tightening (~30%). Next highest is an explicit Crash in Global Bond Markets (~20%). Rounding out the list of credit-specific items would be a Liquidity/Funding crisis (~4%). What is concerning is that these risks together jumped around 20% month-over-month compared to April! And the one that increased the most was concern around a potential Chinese credit tightening. The biggest positive change (reduced concern) related to EU disintegration risk, which dropped precipitously following the french election.

So how worried should we be about bond markets, and how worried are governments? Worth noting is the fact that the balance sheets of the BOJ and the ECB are now both surpassing that of the Fed. So both east and west are continuing to spend significant funds to prop up their bond markets. Are we nearing the end phase? One sign may be the latest financial structuring innovation:  government bond-backed securitization. This latest innovation is designed to shore up confidence in european bond markets, and it will allow us to provide tranched leverage to portfolios of government securities. Perhaps that is why fund managers are getting worried again about credit!