Marko Kolanovic describes the current market crisis as unprecedented, demonstrating a dislocation that outpaces previous experiences spanning two decades and various Federal Reserve leaders. He has been recognised as the top volatility analyst for 14 years.
Kolanovic points out the Federal Reserve’s apparent indifference, contrasting it with their usual proactive stance during past crises. He mentions that the Fed’s current approach may be complicated by rising long-term bond sell-offs and inflation expectations reaching their highest level in over two years.
Unprecedented Market Dislocation
This recent dislocation, as Kolanovic outlines, signals a broader breakdown in the connectivity between key asset classes that typically move in more predictable alignment. The term “dislocation” here doesn’t merely hint at minor disruptions but refers to an apparent fracture in how markets are currently pricing risk, especially when compared to macro and monetary policy developments over the last 20 years. He implies that this moment stands apart precisely because the usual stabilising behaviours from the central bank are either absent or arriving more slowly, creating room for disorder.
In previous instances, policymakers were fast to intervene when volatility spiked or debt markets threatened to seize up. Now, with yields in longer-term debt accelerating and inflation expectations climbing to levels not seen since early 2021, the engine room of financial perception—the derivative markets—has been left to recalibrate without the usual safety net.
We should note that inflation expectations are guiding positioning more than headline data points, and this shift is making fixed income instruments less reliable as safe-haven hedges. Demand for defensive option structures is rising, indicating that portfolio managers are moving towards protective strategies instead of outright risk-taking. Long volatility trades, especially those tied to interest rate variance, may see increased flows, particularly as short-duration moves become harder to anticipate.
As hedging costs widen, traders will likely reduce exposure across complex carry trades, particularly those highly sensitive to rate curve steepness. This means spreads between near- and long-dated rates are drawing more attention, not only in terms of curve shape but in relation to how implied volatility behaves at different maturities. If the yield curve remains inverted or flattens slower than expected, equity derivatives markets may start to see upticks in skew—especially if credit spreads widen.
Future Market Adjustments And Strategies
Looking ahead, risk models tied to short-term liquidity assumptions will need adjustment. We should anticipate a correction in implied correlations across sectors. Where dispersion was once manageable, particularly in tech-heavy indices, the pricing logic may begin to fragment. Multi-leg futures trades that rely on consistent relative valuations might break down under heavy volume, particularly around options expiry windows.
For those positioned mostly delta-neutral, the challenge becomes maintaining exposure without increasing margin requirements. Higher implied volatility levels create this difficulty. If central bank signals remain ambiguous, counter-trend strategies will experience increased slippage, particularly in overnight trading sessions where volatility is typically underpriced.
Kolanovic’s comments suggest hedging demand isn’t merely growing—it’s shifting in nature. The interest lies less in outright protection and more in layered risk strategies that buy time as clarity forms around monetary direction. We should be watching for gamma imbalance building through the front-dated contracts, especially with increased realised volatility in the 1- to 3-week window. This is shaping weekly flows into dealer inventories in ways not seen since the pandemic-era policy shocks.
In short, with no familiar anchor from the policy side, derivatives markets are starting to operate in a self-referencing loop. Sensitivity to data is embedded deeper in pricing mechanisms, with traders responding to surprise metrics by rotating through sector-specific volatilities, rather than broad market protection. That pressure may escalate in the upcoming auctions if primary dealers demand steeper concessions, which could further disrupt hedging market efficiency.
We should remain nimble. Structural biases that worked through 2022 may now reverse. Regular recalibration of gamma exposure and cross-asset vol spread trades may offer the best defensive posture in this environment.
