Current consensus on risk-on positioning could lowers threshold for negative surprises: Barclays

Published 31/01/2025, 10:38
© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect

Barclays (LON:BARC) strategists took note of a notable shift in risk premiums, with the S&P 500 equity risk premium (ERP) nearing record lows, just a few basis points below zero. This level is close to the lowest observed in the past decade.

In contrast, investment-grade (IG) option-adjusted spreads (OAS) have dipped below 80 basis points (bp), also approaching a ten-year low. Simultaneously, the Treasury term premium has experienced a significant increase since the Federal Reserve’s initial rate cut, now positioned above the 99th percentile of the past decade’s observations.

The current financial landscape reflects a reduction in safe-haven demand, attributed to tight labor markets, proactive rate cuts by the Federal Reserve, and a new pro-growth administration in the United States. These factors are contributing to a rise in real yields and the term premium.

Barclays have observed a shift in government bond fund flows, favoring shorter durations, which in turn tightens equity and credit risk premiums. This movement aligns with the broader market sentiment anticipating a "no landing" scenario, where the economy avoids a significant downturn.

Strategists pointed out that while low equity risk premiums have characterized the remarkable equity gains over the last two years, investors should remain vigilant. The firm suggests that the current consensus on risk-on positioning could potentially lower the threshold for negative surprises in the market.

Despite the low risk premiums being a characteristic of the recent bull market, Barclays cautions market participants to monitor these levels closely. The firm’s analysis suggests that while the market may be leaning towards optimistic scenarios, there remains a possibility for unexpected bearish developments.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers
© 2007-2025 - Fusion Media Limited. All Rights Reserved.