A measure of bond-market volatility known as the ICE BofAML U.S. Bond Market Option Volatility Estimate Index recently hit the lowest level since early February.
Photo: Scott Olson/Getty ImagesBond-market volatility has dropped dramatically, sending a positive signal for the U.S. stock market.
A measure of bond-market volatility known as the ICE BofAML U.S. Bond Market Option Volatility Estimate Index recently hit the lowest level since early February, before U.S. stocks entered a bear market and fears of a recession intensified. The measure jumped dramatically during the market turmoil in March and has now receded to average levels over the past decade.
Meanwhile, the Cboe Volatility Index—a measure of stock-market volatility—closed Thursday at 41.67, well above the average level of roughly 18 that the index has recorded since 2009.
“Volatility within the stock and bond markets has recently parted company,” Jim Paulsen, chief investment strategist at the Leuthold Group, said in a research note earlier this week.
On March 19, both indexes were near their highest levels in history, according to the Leuthold Group. The drop in bond-market volatility compared with stock volatility has happened previously and tends to be followed by strong stock returns, the firm said. That was the case in February and December of 2018, the firm said.
“This relatively rare condition of intense stock market fear, combined with a generally calm bond market, has proved to be a powerful combination for ensuing stock-market returns,” Mr. Paulsen said.
It is a sharp shift from last year, when measures in the bond market were flashing red while stock-market volatility receded. For example, a widely followed bond-market signal known as the yield curve was also indicating that a recession was on the horizon.
The S&P 500 gained 12% this week, its best weekly performance since 1974. Markets were closed Friday for the Good Friday holiday.
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April 11, 2020 at 12:00AM
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