By Isabel Wang
Stock investors may want to pay more attention to the volatility of bonds than stocks, says Ned Davis Research
Volatility in the world's largest bond market has trended lower in 2024, a welcome sign for equity investors as a relatively calm government debt market could offer buying opportunities for US stocks, according to Ned Davis Research.
"Stocks like it when the bond market performs and volatility decreases relative to their two-year average... By contrast, stocks struggle when bond volatility increases," said Joseph Kalish, chief macro strategist. global, and London Stockton, research analyst, in a report. Friday note from Ned Davis.
The ICE BofA Merrill Lynch MOVE Index, a measure of implied volatility in the Treasury bond market, has declined 18.1% so far this year, according to Dow Jones Market Data. Similar to what Cboe's VIX volatility index, known as Wall Street's "fear gauge," does for the stock market, the MOVE index calculates option prices to reflect traders' expectations about short-term volatility in the fixed income market.
The MOVE index is down 33.8% since peaking on Oct. 3, when long-term Treasury yields set new multi-year highs as investors sold government debt on fears that the Fed Fed would have to keep interest rates high longer, according to Dow. Jones Market Data. Bond prices and yields are inversely related.
Yields on 10- and 30-year Treasury bonds have since fallen as Federal Reserve officials made clear in April that they considered further rate hikes unlikely. The 10-year yield BX:TMUBMUSD10Y rose 5.5 basis points to 4.503%, while the 30-year rate BX:TMUBMUSD30Y rose 4.6 basis points to 4.645% as of Friday afternoon, data showed by FactSet.
Meanwhile, a "moderate" correlation between bond and stock trading volumes also suggests potential buying opportunities in US stocks, analysts at Ned Davis said.
"Typically, stock volatility far exceeds bond volatility. In recent months, that gap has narrowed, [with stock volatility] even falling below bond volatility at the end of last year," Kalish and Stockton said (see chart below). "As a result, stock investors may want to pay more attention to bond volatility than to stock volatility, as additional declines in bond volume could support a further rally in stocks.โ
Watch: The real reason Wall Street's 'fear gauge' seems so low right now
VIX issues a 'sell' signal
In stark contrast to what falling bond market volatility suggests, the Cboe Volatility Index, or Vix, flashed a sell signal for stocks earlier this week, Kalish and Stockton wrote.
Historically, sell signals have been associated with markets that have struggled, while buy signals have typically been generated after volatility has peaked relative to the trend and have typically resulted in better than average market returns.
The Vix has fallen nearly 20% so far in May and is down 16.2% month over month, trading at 12.56 as of Friday afternoon, according to FactSet data. "[Stock-market] "Volatility has decreased so much compared to the last 20 days that our indicator issued a sell signal on Monday," said analysts at Ned Davis.
U.S. stocks finished mostly higher on Friday, with the Dow Jones Industrial Average DJIA rising for the eighth consecutive session, extending its longest winning streak of 2024. The blue-chip index rose 2.2% this week, recording its greatest weekly progress in points and percentages. since December, according to Dow Jones Market Data.
The S&P 500 SPX and Nasdaq Composite COMP rose 1.9% and 1.1%, respectively, according to FactSet Data.
-Isabel Wang
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05-11-24 1006ET
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