Why Stocks May Be Able to Look Past the Big Bond-Volatility Jump
Huge Stock-Bond Volatility Disconnect May Not Mean VIX Explosion
(Bloomberg) -- Tumbling bond yields since the Federal Reserve’s dovish March statement may not necessarily suggest the growth outlook is so bad that equities need to fall in sympathy.
That’s one potential interpretation of the disconnect between the surge in volatility in U.S. Treasuries the past two weeks and the relatively subdued fluctuations in stocks. Sundial Capital Research Inc. looked at what’s happened historically when volatility in Treasuries hit a 100-day low -- as occurred before the pivotal Fed meeting on March 20 -- then surged by at least 25 percent while outpacing any spike in equity fluctuations.
The bottom line: equities don’t always follow with turmoil of their own. Three times since 1990, the Cboe Volatility Index, or VIX, mostly rose over the next month, and three times it fell, Jason Goepfert, president and founder of Sundial, wrote in a March 28 note. “The risk/reward was about even.”
The analysis also showed that the Merrill Option Volatility Estimate Index, a gauge of swings in Treasury prices, consistently declined after those episodes -- “usually right away.”
“A common belief is that bond investors are smarter than stock investors. We’ve looked at that idea a bunch of ways in the past, with the conclusion that it’s kinda-sorta true,” Goepfert wrote. “But it’s not consistent enough to automatically assume that the bond market suddenly knows something that stock investors don’t.”
To contact the reporters on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net;Andreea Papuc in Sydney at apapuc1@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen
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