Volatility Might Be Awakening From a Coma, But It's Still Groggy

(Bloomberg) -- Volatility is picking up again in markets after a prolonged period in the doldrums. The S&P 500 Index tumbled the most in six weeks on Thursday and Treasuries are heading for their worst four-day slump since March.

Investors responded with a rush to the hedges -- driving up options prices that are tracked by fear gauges and feeding concern this year’s relentless stock rally is teetering on the brink of a serious reversal.

The rout still left global equities on the cusp of eight months of gains and not far from a record high, even as central bankers raise the prospect of a tightening cycle. And as the charts below show, implied volatility remains near some of the lowest levels ever seen.

The CBOE Volatility Index just had its biggest intraday increase since the Brexit vote a year ago, at one point surging 51 percent. The S&P 500 slid as much as 1.4 percent, the most since May 17, as most sectors took a beating, particularly technology. Ten-year Treasuries are falling a fourth day, with their yields climbing 13 basis points this week. Yet volatility is still only half the level of early November and a long way from the 26-mark hit last June.

Volatility in Treasuries and stocks rebounded in June, the first time since October that both rose. It was hardly a dramatic recovery though, and a major currency gauge was down. Volatility has dropped as financial institutions ease up on riskier investments amid tighter regulatory curbs after the global financial crisis.

This week’s turmoil has done little to disturb long-term trends, however. 
The S&P 500 remains well above its 200-day moving average, and it’s gone more than six months without a one-day drop exceeding 2 percent, the longest such stretch in a decade. The key market to watch may be bonds, where 10-year U.S. Treasury yields have just come back above their moving average.

As the final chart shows, fear gauges are still rather close to their all-time lows.

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