Goldman Strategists Flag Dollar, Junk Bonds for Risk-Off Hedges

Investors worried the current risk-asset euphoria portends a sell-off should look to the dollar and U.S. credit markets to hedge their portfolios, according to Goldman Sachs Group Inc.

Implied volatility in U.S. equities remains elevated compared to that in the dollar and corporate bond markets, making downside protection bets using stock options expensive, wrote strategists including Christian Mueller-Glissmann in a note Tuesday. That’s not the case in currency and credit markets, where options pricing is more attractive, they said.

“With equity volatility still somewhat expensive we prefer selective ‘risk off’ hedges in FX and credit,” the team wrote. In a risk-off scenario “most assets are likely to suffer except for the dollar,” it said.

Global stocks have started the year as they finished 2020: the MSCI AC World Index rose to a fresh all-time high last week. Yet there are lingering concerns about speculative excess in the middle of a pandemic, with valuations rich across many asset classes.

Goldman Strategists Flag Dollar, Junk Bonds for Risk-Off Hedges

The Goldman strategists noted that short-dated options on high-yield U.S. corporate debt are trading at extreme lows relative to those on equities. That makes downside hedges on credit, such as a put spread on the iShares iBoxx High Yield Corporate Bond ETF, attractive, they said.

“We also think the asymmetry in credit is worse than in equities from here and credit protection appears more attractive,” they said.

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