Chart of the week

Treasury and equity volatility reach recent peaks

Markets have been choppy and there could be more to come. This week’s chart looks at recent rises in expected equity and Treasury volatility.

May 6, 2022 | 2 minute read

MOVE and VIX rise in unison

Source: Bloomberg Finance, L.P., FS Investments, as of May 5, 2022. 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).

  • Markets jumped on Wednesday, a welcome relief rally as investors cheered Fed chair Powell pouring cold water on the idea that the Fed would raise rates in 75 basis point increments this year. The S&P 500 rose nearly 3% on the day while the 10-year U.S. Treasury yield moved lower, partially reversing a sharp rise since late April.
  • Almost immediately on Thursday, however, the realities of today’s difficult macro environment settled in again as both equity and Treasury markets fully erased the prior day’s action. Even with the prospect of larger hikes off the table, the 10-year easily cleared 3% as investors manage through potent inflation drivers including COVID lockdowns in China that will intensify global supply chain issues and the war in Ukraine that could exaggerate commodity prices.
  • Against this backdrop, indexes measuring expected volatility within the equity (black line) and Treasury (orange line) markets have risen in unison, reaching recent peaks. Importantly, the increases come after a decade of relative calm in both markets (excluding the short but violent volatility in March 2020), potentially leaving investors in traditional assets vulnerable to continued turbulence.
  • Of course, no one knows what lies ahead in either market and a rally is not out of the question. Given the notably unsettled macro environment, however, investors may be wise in adding investments with limited correlation and downside protection potential to their portfolios.

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