All Options Considered: AI FOMO, Yen, Making Sense of Volatility

Welcome to FICFocus, where Bloomberg Intelligence fixed income credit currency and commodity strategists and analysts discuss their short and long-term views on debt markets and issues. Now here's the Bloomberg Intelligence FIC research team. Welcome to this edition of All Options Considered. I'm També Sandu, Chief Global Director of Strategies for Bloomberg Intelligence, the Research Arm of Bloomberg. It's Friday, May 1, 2026. On this episode I'll be discussing cross-asset markets, reflecting back before looking forward, the crash up in the equity market, rates fall and dollar yen intervention are the topics. The markets were essentially trading in a one-factor mode in March with oil. The volatility surge outside of commodities was most pronounced in rates, particularly in European rates, and equity vol was most notable in Europe and Asia given the greater energy dependence. Correlation broke down with traditional safe savings, not performing as bond yields rose on inflation repricing, gold sold off with equities, while the dollar provided some shelter. So the negative correlation between equity and oil, so a more negative equity rates correlation. Gold had a steep decline on liquidation, on higher dollar and higher real yields. Oil prices remain above $100, and oil of our remains near the top end of its historical range on upside risk due to physical supplies shortages. The de-escalation pulled volatility of panic highs, but it remains elevated. So structures such as put spread ratios or put flies offer leverage downside with a net sure of all profile. The equity market saw the increasingly familiar path of taking the escalator down and elevator up. The result is a market more concerned with under exposure to the right tail, even as oil vol stays elevated on unresolved supply risk. The right-tailed chase shows spot-up volet behavior, while grind-lower dynamics continued to define the downside path, shaping option structures to navigate the path. The gap between implied and realized vol was unsustainable, with VIX around 30, while the delivered moves lagged well behind leaving short-dated optionality expensive to hold. A notable move has been the speed of the VIX crush back towards S&P Realized Vol, compressing that wide volatility risk premium. So the AI FOMO has lifted demand for upside convexity after the rip higher since the Iran ceasefire. Realized vol has been higher on updates driven by under-exposed investors being forced back into risk, as well as systematic flows and dealers getting short gamma as the market moves higher. We saw two of the largest moves over this period being up moves. The semiconductor index had a high vol move to the upside. It's up about 50% over April, which highlights the chase for the upside and the equity market right-tail asymmetry. So yes, the path of release resistance for the market is higher and we are at the beginning of the greatest technological revolution of all time and the race is on for superintelligence. In this environment, chasing it here or missing out on the tech right-tail is a tough proposition and therefore upside options look interesting at this stage to capture the rally while containing left-tail risk. So moving on to the bomb markets, European rates vol saw an outsized move following the onset of the Middle East war with Euro rates while reflecting the repricing of ECB expectations from on hold to possible hikes by year end. Sterling rates vol had a big shift from pricing cuts to hikes. At peak stress, the options market was pricing a larger risk of a number of hikes from the ECB in Bank of England as well as the Fed and the key metrics to watch have been longer-dated inflation expectations which have seen limited moves and forward curve dynamics in oil. So to put these rates moves into context, we had higher levels of volume Euro rates during the 2022-23 hike cycle, higher US rates vol during the US regional banking stress in 2023 and we had the outlier of the extreme UK bomb market while during the 2022 mini budget when Lystruss was Prime Minister. The oil spike pushed rates vol higher as the first round effects of inflation shifted the distribution around the path of policy rates. So the rise in rates vol has been led by frontend tenors as the market pricing of cuts was pushed out and the extent reduced and short expiry volume frontend US rates likely had some spill over from the large moves in European rates driven by the highest sensitivity to energy prices and the ECB and Bank of England price stability mandates versus the dual mandate of the Fed. As tail scenarios around energy and inflation received, the policy distribution titans weighing on the wall against the pre-war baseline US gamma across tenors has now decreased the event move while European oil lags. The rates for regime are shifted to distribution tightening from shock pricing where the path matters less than the narrowing of plausible endpoints. While the modal path trajectory has shifted higher given more persistent inflation risk, the dispersion around the path is compressing. This combination, higher mode, tighter distribution, weighs on wall at the front end of the yield curve. The ECB is currently within the neutral policy rate range, it retains flexibility to tighten, implying a relatively low bar for hikes. Lagardas opened the door for a hike in June but conditioned it on the duration of the conflict. So there is some chance of no action if the straight-off amuse opens soon but a 25-bip hike in June should be the market's baseline for now. The Bank of England, however, can argue be a fall to be more patient with being on hold meaning effectively maintaining tight policy. So the Bank of England seems skewed to be in an active on hold stance and is led in the market to the work. And the communication from the ECB and BOE meetings this week is also a function of the starting points of policy rates with the ECB seemingly more hawkish than the Bank of England given the current bank rate of 3.75% being restrictive in contrast to the ECB at 2%. So this leads room for further premium compression even if the end point for policy remains higher than pre-world levels. And finally regarding Dolly-N, which had about a 5-big figure move lower in today from the high to the low. As it looks like Japan's intervening game in the market following the strong warnings from the Ministry of Finance that action will take place to stem the weakening of the Yen. It should have not come as too big of a surprise with Dolly-N trading about 160 before the warnings ahead of the Golden Week in Japan and Mayday holidays. Japan intervened in 2024 and April 29th and May 1st during their Golden Week public holiday so the market will be anticipating the potential for further intervention early next week. But back in 2024 it didn't see a sustained move lower and the intervention just effectively bought some time, which maybe the case this time with the Bank of Japan tightening early gradually against higher inflation and higher for longer US rates. It probably requires the US Treasury to get involved to see a more sustained impact on Dolly-N. Before the move lower, Dolly-N implied-vile had fallen to below 7%, which was the lowest in a couple of years, with the currency pair stuck in a range just below 160. Knock-in options have looked interesting to me so getting knocked into Dolly-N downside with a barrier above 160. The asymmetric profile of Dolly-N looks interesting with intervention risk on the top side and a scenario of lower equities on increased growth concerns on the downside. So on that, for those in Asia, I hope to see you at the volatility conference in Singapore on June 3rd. Happy trading! (upbeat music)