What is “risk-on” and “risk-off” ?

A. “Risk on” refers to the reflation trade, the idea that the global economy is in recovery and safe-haven plays like long dollars, long US Treasuries, long Swiss franc, long Japanese yen are being liquidated. Typically, in a “risk-on environment, the  dollar falls against most currencies, particularly commodity currencies, on  the idea that fast-growing economies like China will be large consumers of raw materials.

“Risk off” is the reverse. Traders want safety and look for it in the US dollar, US Treasuries, etc and they want to avoid commodity currencies for fear of lower global growth.

US bond yields tend to fall in a risk-off environment and went to rise in a risk-on environment. Investors move out of the safety of low yielding bonds when prospects for higher returns elsewhere improve.

6 Comments

  1. Hi Jamie,
    How can we know when we are in a “risk on” or “risk off” mode?

  2. THANK YOU! I surely hadn’t expected a “front page” answer. I get it now – finally! Blessings upon you!

  3. Seriously? (Face palm)

  4. Why is Gold rising during Risk-On actually? I thought gold is supposed to rise when people are scared in the debt crisis.

  5. During Risk off trades, dollar is demanded worldwide.
    Let’s take one example among many:
    Collaterals with Hedge Funds….

    Hedge Funds are using leverage which means they have to fulfill collaterals requirements due to positive and negative marked-to-market valorisations of their portfolios.
    Hence during big crisis, many Hedge Funds which are suffering negative valorisations which means they have to give dollars to their prime brokers. Then, they need to BUY dollars…

  6. “A Pfennig for Your Thoughts” google this newsletter, read Chucks email everyday and and you get quite a good picture of where the risk scales are weighing and who is about to throw what on which side of the scales. Chuck is pretty accurate for the most part, and his china analysis is really thorough.
    Econometer in the blog roll to the right of this page is also a good read every few days.

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