Macro Report/Insights: Cross Asset Volatility

Moving in lockstep

There is a key relationship you need to monitor right now: How bond volatility is correlating with stock volatility.

Here is a chart of bond volatility (the Move Index in white), stock volatility (the VIX in blue), and TLT (in orange).

One of the key things I noted during the beginning of December was that there was a significant spread between stock and bond volatility. My view was that this spread would narrow.

The key thing to note is the specific direction bonds are moving while implied vol is rising. Notice that in October during the bear steepener, implied vol rose as bonds went DOWN. This relationship flipped as traders realized they needed to put up long bond exposure after the QRA announcement at the beginning of December.

We are now at a position where implied vol is spiking on a marginal pullback in bonds. This is a positive signal for the long bond view I provided on December 13th (link).

What is the main point?

• Bonds remain bullish and are driven by the Goldilocks regime. Any pullbacks are unlikely to have persistence.

I noted in this article that the pricing of the March FED Funds contract is likely to cause some short-term resistance but after that, my view is that we continue to rally in bonds.

If there is one thing you need to remember it is that we are unlikely to have a reply of the COVID-19 price action in bonds. What I mean is that a cutting cycle can take years and we don’t necessarily need to have a huge blowout in price action like March of 2020.

People continue to think we will have an insane move in bonds or equities and this is possible. However, for action, you execute incrementally and adjust dynamically as the probabilities shift.

I will be working on the Comprehensive Macro Report for paid Subscribers and it will provide a full breakdown of all economic data points as well as an analysis of growth, inflation, and liquidity. I will then show how this impacts each major asset class. This is how top-down macro works.

As always, feel free to reach out anytime via DM on Twitter or email me.

Don’t slow down…….