Chart of the week

Treasury market quiets as equity volatility picks up

Treasury rate volatility has flatlined since April. Our chart looks at why yield-hungry investors may need to find new ways to generate income.

September 25, 2020 | 2 minute read

Expected equity and Treasury volatility (indexed to 100)

Source: Bloomberg Finance, L.P., as of September 24, 2020.

  • September has been a tough month for stocks as the Nasdaq and S&P 500 have returned approximately -10.6% and -7.2%, respectively.1 Equity volatility has been driven by a range of factors including a steadily rising U.S. dollar, increasing potential for regulatory action against tech companies, and political uncertainty as the November election approaches. To complicate matters, COVID-19 case counts in the U.S. and globally have been rising again this month.
  • With this in mind, investor expectations for volatility in the equity markets have risen in the past two weeks while the outlook for Treasury rate volatility has moved in the opposite direction. This recent decoupling highlights a similar trend that has taken place since markets began to normalize in late March.
  • The chart shows year-to-date movements of the CBOE Volatility Index (VIX) and the MOVE Index, which measure investor expectations of near-term equity volatility and rate volatility within the Treasury market, respectively. Both indexes spiked together in March before gradually declining over the next several months in the face of massive monetary and fiscal support measures.
  • The VIX, however, has since seen occasional jumps higher – in early June and again this month, for example – and remains twice as high as where it began the year.1 The MOVE Index, meanwhile, anchored by expectations that the Fed won’t move rates from the zero lower bound until 2023, has seen virtually no volatility since April and now sits 33% lower than where it began the year.1
  • Against this backdrop, investors will likely have to continue looking outside of traditional investments in search of competitive income. What’s more, many traditional fixed income asset classes could be challenged in achieving price appreciation in the years ahead as declining rates have largely driven price gains through the past several years.

  • Bloomberg Finance, L.P., as of September 24, 2020.

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