Photographer: Michael Nagle/Bloomberg

Equities Traders Target a Happy New Year as Fear Infects Bonds

  • VIX gauge for S&P 500 is dropping toward the lowest since 2014
  • Bond volatility elevated after worst rout since 1990s

The record-setting U.S. stock rally is wiping out almost any hint of fear for equity investors as this turmoil-filled year in global markets draws to a close. Bond and currency traders face a more complicated future.

The CBOE Volatility Index, often called Wall Street’s fear gauge as it tracks demand for protection against price swings, has dropped toward the lowest level since 2014 even as the rally that took all four main U.S. stock benchmarks to record highs over the past month cools. That contrasts with indicators that show investors expect stronger price swings in currencies and in sovereign securities, after the steepest debt rout in decades prompted speculation that the 30-year bull market in bonds is over.

Bonds started tumbling in September and at first took equities with them. Then, Donald Trump’s surprise election win turned the share market around even as it accelerated the carnage in debt -- world stock market capitalization added almost $2.5 trillion over the past six weeks, while a similar amount came off the Bloomberg Barclays benchmark for global fixed-income securities.

“The split in bond and stock volatility measures is a sign of the contrasting fortunes for the two markets, so the disconnect may continue until bond yields hit a choke point and I doubt we are there yet,” said Nader Naeimi, who heads a dynamic investment fund in Sydney for $116 billion asset manager AMP Capital. “The climb in currency volatility is a bit more concerning. Should it remain elevated, with emerging currencies declining against the dollar, that may yet help to drive up price swings for stock markets.”

One slight sign that the stock market’s future is not entirely unclouded is that expectations for price swings in the CBOE Volatility Index -- the fear gauge’s fear gauge as it were -- have picked up this month even as the VIX itself has declined. If that holds to the end of the year, it would be the first December that has happened in since the VVIX Index, as the gauge of VIX volatility is known, was set up in 2006.

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