Risk Parity Deleveraging “Worth Monitoring” Across Markets: BAML

As markets continue to remain skeptical of a 2016 rate hike, a Bank of America Merrill Lynch volatility research report notes that latent risk in risk parity strategies is “worth monitoring” across markets. Last week’s sharp sell-off in Japanese bonds stoked fears among investors that forced selling by risk parity funds might spread in an ever more globally interconnected world.

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Certain risk parity funds are leveraged to the maximum level, which should be cause for monitoring

Ultimately last week risk parity funds ended up not deleveraging. While the Japanese interest rate...