Chart of the week

Equities, and expected rate volatility, bounce together

Expected equity volatility quickly settled though it continued to climb in the rates market. Our chart revisits the divergence.

December 10, 2021 | 2 minute read

Expected volatility: Equities and rates

Source: Bloomberg Finance L.P., as of December 9, 2021. MOVE Index refers to the ICE BofAML U.S. Bond Market Option Volatility Estimate (MOVE) Index. VIX refers to the Chicago Board Options Exchange (CBOE) Volatility Index (VIX).

  • Equity volatility quickly retreated over the past week and prices rose as news emerged that the omicron variant may be less severe than expected. The decline in volatility was just as fast as the earlier spike when investors reacted to the initial news of the variant along with a more hawkish-sounding Federal Reserve.
  • As equity investors shed their worries this week, the S&P 500 rose 2.8% and touched a new all-time high.1 Underneath the relatively calm equity markets, expectations for volatility in the Treasury markets (MOVE Index) has marched gradually higher since September.1
  • Heightened rate volatility may come as little surprise as the Fed hastens the end of its asset purchase program and may even begin raising interest rates in the first half of 2022.
  • The VIX’s sudden decline, however, may be a different story given the range of potential flashpoints that could impact equity investors. These include weakening investor sentiment, elevated policy uncertainty, sustained inflation and high equity valuations, among other factors.
  • Against a backdrop of declining volatility and increased macro uncertainty, the rates market appears to have internalized potential struggles in a way that stocks have not. We do not know the right indicator. Yet the divergence highlights the importance of investors remaining flexible while potentially adopting a lower-beta approach as the market works through today’s macro uncertainties.

  • Bloomberg Finance, L.P., as of December 9, 2021.

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