Draghi endorses higher volatility but what sort of volatility?
The clear message from Draghi’s press conference yesterday has been his endorsement of higher volatility. His exact words were
“But certainly one lesson is that we should get used to periods of higher volatility. At very low levels of interest rates, asset prices tend to show higher volatility, and in terms of the impact that this might have on our monetary policy stance, the Governing Council was unanimous in its assessment that we should look through these developments and maintain a steady monetary policy stance.”
One interpretation of his comments would be that he endorses higher volatility across the board. The other more nuanced interpretation could be that he endorses higher term premium to reflect greater volatility in the underlying risk free rates but not necessarily higher volatility in spreads which would be related to default risks, Eurozone break-up fears etc. This should result in higher volatility in bund yields but not necessarily higher volatility in core-periphery spreads. This would be consistent with a more normal pre-crisis world where the volatility of bund yields was much higher than the volatility of core-periphery spreads.