Don't be lulled by low volatility

JOHN Templeton, the pioneer in global mutual funds, once said "the four most costly words in the annals of investing" are "this time is different". That should resonate with monetary policy makers and institutional investors grappling with the causes, impacts and risks of the lowest market volatility, by far, in the era of modern finance.

As this cycle of exceptional stability grows longer, there is temptation to conclude that low volatility is a permanent characteristic of markets. This time is surely not different, however, and the risk-taking that hinges on such an assumption is highly vulnerable to the inevitable episode of market disruption.

First, let's appreciate how substantial the decline in volatility has been. On pace to finish below 7 per cent in 2017, the realised volatility of the S&P 500 Index is the lowest in more than 53 years. In the Treasury market, 10-year yields have remained within a 60 basis-point range this year, the tightest since 1965. This chart tells the story of motionless asset prices, both of the risky and risk-free variety.