year or so. but the relatively stable aggregate outcome masks quite a lot of variation across countries. a good example is the high volatility in growth in the first two quarters of this year in the us and japan, the former resulting from weather, the latter from the consumption tax increase. nevertheless, the relative stability of macroeconomic outcomes might be delivering a little more stability in the numerator in investors ’ calculation of expected future returns. but it is not clear to me why there should be more stability in the denominator, the discount rate. if anything i would argue the converse, namely there is at least as much uncertainty about the future path of interest rates as in earlier periods. one popular argument for stability is that the low volatility reflects the forward guidance of central banks. this has purportedly reduced uncertainty about the outlook for policy. two - way volatility in interest rates has naturally been restricted as rates have moved towards the zero lower bound, but much of this effect has been present for some years now. bis central bankers ’ speeches moreover, with the zero bound being reached, policy uncertainty should translate to uncertainty about the use of other non - conventional tools to ease monetary policy. that is certainly true in japan in recent years and more recently has been the case in europe. but more importantly in my view, while there is more forward guidance from central banks in place than in the past, investors don ’ t have to believe it! indeed, there are plenty of examples in history where that has been the case. i find it somewhat surprising that the market ( in aggregate at least ) is willing to accept the central banks at their word and not think so much for themselves. moreover, as has been articulated any number of times, the guidance is clearly data dependent. if the data moves unexpectedly, in all likelihood so will the central bank. markets appear to be underestimating that possibility. one thing which is certain is that the low volatility will not persist. what will cause it to end? i really don ’ t know, as any of the events i mentioned earlier could have been a trigger for more volatility, but clearly they weren ’ t. one interesting market development is how cheaply volatility protection has been sold over recent months. there has been an increase in supply as more institutions who have not been traditional sellers of protection enter this market seeking returns as part of a search for yield. while that may have dampened volatility of late

fixed income markets globally, and most easily in us treasuries, there is little in the way of term premia ( that is, return for holding duration ). there also appears to be very little uncertainty priced in about the movement in short term interest rates. at the end of last year, the term premia had started to rise, separate from any increased uncertainty about short rates, this separation was a good thing. but those premia have now fallen right back. my concern is that both of these will rise in concert, exacerbating the disruptiveness of the sell - off. in thinking about the magnitude and nature of any sell off, an important question to think about is who will take the other side of the trade? how far do prices need to go before someone is willing to take the position? those questions are always relevant but the answers may be different this time around. i will now turn to look at some pricing developments in the foreign exchange market where as i mentioned earlier, there has been some return to more normal levels of volatility in recent weeks. fx the main development in foreign exchange markets in recent months is that the us dollar has appreciated. this has been a long - awaited event by many market participants, including ourselves. a sizeable number of macro funds had lost a fair amount of money over the past bis central bankers ’ speeches year waiting for this event to happen. 1 why the us dollar stayed at its low levels for as long as it did, and why it finally started to appreciate when it did, has baffled many in the market. as keynes famously said, ‘ the market can stay irrational longer than you can stay solvent ’. a few well - known hedge funds came close to proving that proposition over the course of this year. the appreciation of the us dollar was not associated with any noticeable change in interest rate expectations in the us, and, in the case of the aud / usd exchange rate, there was no material change in australian interest rate expectations either. while the us dollar has appreciated, on a trade - weighted basis it is still not that far above its all - time lows reached in 2011. it has only appreciated by 4 per cent in the past few months, which is a small move in the history of swings in foreign exchange rates, where movements of up to 40 per cent have occurred. similarly, while the euro has depreciated in recent months, on a trade - weighted basis the euro is not