Mandy Xu on Rising Volatility in Bonds and Equities

Divergence in Volatility Signals

• 💡 Despite the VIX retreating to its lowest level in over a week, volatility in other asset classes is increasing.
• ⚠️ This divergence between the VIX and other markets is described as unusual.

Bond Market Volatility and Options Positioning

• 📈 The VIX TLT indicator, measuring volatility in the bond market, rose significantly last week and remains near multi-year highs.
• 📉 This move is comparable to the volatility seen in 2022 when the Federal Reserve was aggressively raising rates.
• 📊 Options positioning in the bond market has flipped, with a recent shift towards demand for puts in TLT, indicating a move towards positioning for higher yields.

Erosion of Confidence and Macro Outlook

• 📉 Falling treasury prices and a weaker dollar over the past week suggest an erosion of confidence in US markets.
• ❓ The increased volatility in other asset classes could induce additional volatility in equity markets and signals a more uncertain macro outlook than currently priced into equities.

Cost of Protection and Duration of Volatility

• ⚠️ While protection premiums are lower than a week ago, they are still elevated compared to two years ago.
• 📈 Demand for protection continues in the equity options market, even as markets have rebounded.
• ⏳ This period of volatility could last longer than anticipated, especially if fundamentally driven, unlike shorter, technically driven VIX spikes.
• 📉 Prolonged periods of elevated volatility can occur during recessions.