Low Bond Volatility Is Looking Ever More Like An Outlier

Authored by Simon White, Bloomberg macro strategist,

Volatility is rising across major asset classes, with Treasuries the notable exception.

Volatility is infectious.

In economic and financial shocks, it propagates across asset classes as more variable cash flows disrupt credit spreads, moves in rates affect the discounted value of cash flows, and margin calls in one market can force selling in another.

Measures of implied volatility have risen since the war with Iran began, especially in oil, as a cursory look at the price swings would tell you.

FX vol has risen, as well as that of credit spreads, although not to the extent seen in the wake of the tariff tantrum last year.

The VIX initially rose quite sharply after the attacks on Iran were launched, but it has come back down, partly as early demand for downside insurance has come quite sharply lower.

But what stands out is the muted rise in Treasury volatility. It has barely risen this month.

That seems like an anomaly that won’t persist for too long given burgeoning inflation pressures. It’s quite likely longer-term inflation expectations have barely been marked up much at all since the conflict in the Middle East began.

Rises in cross-asset volatility are a bad omen for equities.

A stock market downturn signal which triggers when the average of the vol percentiles in the above chart goes above 90% is shown in the chart below.

It has not triggered yet, but at 82% we are getting close.

The stock market has been remarkably relaxed given the extant geopolitical risks.

If cross-asset vol keeps rising, it is unlikely to be able to maintain its composure.