According to Ned Davis Research, the world’s largest bond market has seen a decrease in volatility in 2024. This is seen as a positive development for stock investors, as a calmer government-debt market could present chances to purchase U.S. equities.
Stocks tend to respond favourably when the bond market is stable and volatility is lower compared to its 2-year average. … On the other hand, stocks face challenges when bond volatility increases,” noted Joseph Kalish, the chief global macro strategist, and London Stockton, a research analyst, in a recent Friday note from Ned Davis.
According to Dow Jones Market Data, the ICE BofA Merrill Lynch MOVE Index has experienced a decline of 18.1% year-to-date. This index serves as a gauge for implied volatility in the Treasurys market. Just like the Cboe Volatility Index VIX, which is often referred to as the “fear gauge” on Wall Street, the MOVE Index calculates options prices to mirror traders’ predictions of short-term volatility in the fixed-income market.
According to Dow Jones Market Data, the MOVE Index has experienced a significant decline of 33.8% since its peak on Oct. 3. This decline occurred as investors sold off government debt due to concerns about the Federal Reserve potentially maintaining higher interest rates for an extended period. The relationship between bond prices and yields is inverse.
The yields on 10- and 30-year Treasurys have been decreasing since April, as Fed officials indicated that they did not anticipate further rate increases. The 10-year yield BX:TMUBMUSD10Y increased by 5.5 basis points to 4.503%, while the 30-year rate BX:TMUBMUSD30Y went up by 4.6 basis points to 4.645%, as of Friday afternoon, according to FactSet data.
Meanwhile, the analysts at Ned Davis have pointed out a “moderate” correlation between trading volumes for bonds and stocks, which could indicate potential buying opportunities in U.S. equities.
“Usually, stock volatility greatly exceeds bond volatility. In recent months, that gap has narrowed, [with stock volatility] even falling below bond volatility late 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 equities.”
VIX indicates a ‘sell’ signal
Despite the indication of declining bond-market volatility, the Cboe Volatility Index, or Vix, sent a signal to sell equities earlier this week. Kalish and Stockton wrote.
Historically, struggling markets have often been accompanied by sell signals, while buy signals tend to emerge after volatility has peaked relative to trend, leading to better-than-average market gains.
The Vix has experienced a significant decline of almost 20% in May, with a month-over-month drop of 16.2%. As of Friday afternoon, it was trading at 12.56, according to FactSet data. “Volatility has decreased significantly compared to the past 20 days, leading our indicator to signal a sell on Monday,” stated the analysts from Ned Davis.
The U.S. stock market closed on a positive note on Friday, as the Dow Jones Industrial Average continued its impressive winning streak, marking its longest run of consecutive gains in 2024. The blue-chip index experienced a notable increase of 2.2% this week, marking its most significant weekly point and percentage gain since December, as reported by Dow Jones Market Data.
According to FactSet Data, the S&P 500 SPX and the Nasdaq Composite COMP both experienced gains of 1.9% and 1.1%, respectively.
