Goldman, Morgan Stanley Debate: Is Volatility About to Creep Up?

With the volatility in interest rates, currencies and oil of late, analysts at Goldman Sachs and Morgan Stanley debated whether it will bleed into equities in two separate notes. Goldman said that "being short [equity-market] vol has paid off in 2015," much like prior years. Krag Gregory, Goldman's top analyst on the note, pointed to Credit Suisse AG - VelocityShares Daily Inverse VIX Short Term ETN XIV and ProShares Trust II SVXY as evidence, each of which have gained more than 42 percent year to date.

Adam Parker, the top analyst on Morgan Stanley's note, said that the firm expects every 20 basis point widening in credit spreads to cause the SPDR S&P 500 ETF Trust SPY to decline by 1 percent. To have a similar decline in equities, the U.S. dollar index would have to increase 7 percent.

Goldman said that the recent bond and currency volatility is "something we will be watching closely as a potential signal that equity implieds may rise." However, the analysts cautioned that "the VIX has rarely listened to the rates market."

Morgan Stanley seemed to agree with that assessment, stating that "all other volatility effects are subsumed by the equity market and other macro factors."

Morgan Stanley said that in terms of expected returns, having a 1-in-20 low volatility month would add 50 basis points to expected returns. Conversely, having a 1-in-20 high volatility month would remove 100 basis points from expected returns. Pointing to May's performance, Morgan Stanley's quants said that volatility in the yield curve likely subtracted 46 basis points from performance.