Late Happy New Year, and welcome back to our weekly positioning update!

What a start to the year! Equities are fluctuating, bond yields keep climbing, and there are few places to hide from the surge in realized volatility. At the end of last year, we published a series of notes discussing how stretched equity positioning was and the risks posed by higher equity concentration, the dispersion trade, and systemic inflows into equities if the macro outlook shifted.

While the macro outlook hasn’t changed drastically, current trends have intensified. Inflation expectations are rising, bond yields are higher, and policy-driven volatility has become a global phenomenon, no longer confined to the US (and, to some extent, the UK). While we were optimistic about the case for long bonds and expected yields to catch up to macro and traded inflation levels, the global transfer of inflation risk is a game changer. Even China, showing signs of life in our models, suggests that reflation is back! China was one of the reasons we doubted the higher inflation narrative—US inflation paired with a weakening China didn’t add up. However, if China’s recovery is real, this materially changes the outlook.

So far, 2025 has been the year of policy volatility, but will it also be the year of equity volatility? We’ve seen a significant increase in realized volatility. As we’ve covered before, this is closely tied to asset manager positioning in the S&P 500 and other equity indices, driven by vol-target funds, risk budgets, etc. There is a lot of positioning to unwind if volatility continues to rise!

Chart 1.a: A lot of unwinding if volatility keeps going