This Fear Gauge Is Rocketing To Extreme Levels

This Fear Gauge Is Rocketing To Extreme Levels
Stéphane Renevier, CFA

9 months ago1 min

US Treasury bonds are vitally important to the financial system: they’re not just the ultimate “risk-free” asset, they also act as collateral for loans and are used to price almost all financial instruments. It’s essential, then, that they remain well-behaved.

Only they haven’t lately.

The volatility of Treasuries (blue line) has been high for months and in the past week has soared to levels not seen since the start of the global financial crisis in 2008. On one hand, it indicates that bond investors are more worried about the big picture. On the other, it reflects that funding markets are stressed and not functioning as well as they should.

This matters: volatile bond markets lead investors and companies to take fewer risks, which in turn reduces liquidity. And that sends ripple effects across the economy and other asset classes. We’ve seen this many times (including in 2008). Bond volatility tends to soar a few months before stock volatility (white line).

Now, this doesn’t guarantee that a crisis is on the way (bond volatility spiked in 2010, 2013, and 2015 without a meltdown, but was more muted), but it is yet another signal that markets are stressed, and that greater stock volatility could be in the making. So remember to be cautious. You know the drill: play defense (diversify across asset classes, hold some cash, don’t use leverage) and make sure your portfolio can handle extreme scenarios. Better to be prepared than sorry.



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