Chart of the week

Bonds face shifting macro landscape amid equity volatility declines

See why investors seeking stable income may need to look outside of traditional fixed income markets to find it in today’s environment.

November 15, 2019 | 2 minute read
  • Stocks are up more than 4% since the start of October, bolstered recently by a better-than-expected Q3 corporate earnings season, firming U.S. economic data and increased hopes that the U.S. and China will finalize a “phase one” trade deal later this month.
  • Against this backdrop, stock market volatility hit a three-month low this week and has been gradually falling since August. In stark contrast, expected volatility within the bond market, as represented by the MOVE Index in the chart, spiked in May and has remained volatile through the second half of 2019.1
  • Unlike stocks, which saw a relatively steady rise this year, bond markets absorbed the brunt of shifting central bank policies and declining global growth expectations. In late May and again in late July, for example, markets quickly priced in Fed rate cuts as economic data and trade conditions soured. Since early October, bond markets digested an approximately 45 bps rebound in 10-year Treasury yields as trade tensions eased and economic data improved.
  • For much of this year, government bond yields have been flashing a caution sign as equity markets raced ahead. Year-to-date returns across major fixed income indexes have been healthy. However, they were also characterized by periods of significant volatility and notable divergences across sectors and by credit rating.
  • Investors typically seek competitive levels of stable income from their fixed income investments. They may need to look outside traditional markets to find it in today’s environment.

  • Stock market volatility represented by the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX. Bond market volatility represented by the ICE BofAML U.S. Bond Market Option Volatility Estimate (MOVE) Index.

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