We highlighted a few weeks ago the absolute collapse in FX volatility, especially volatility of the JPY/USD cross, but the fact is that volatility in most asset classes is testing its lower limits historically. That is, to be specific, all the major liquid asset classes except government bonds. In the first four charts below we show our GaveKal Capital Volatility Indexes for FX, global equities, global corporate AAA bonds, and commodities. In all four cases our index levels are at or very near the all-time lows and are near two standard deviations below the mean going back to the index start date. Now, contrast this lack of volatility with the recent pick up in volatility seen in our Government Bond Volatility Index that has taken the index toward two standard deviations higher than the mean (5th chart below). The divergence is unmistakable. When we dive deeper into the components of our Government Bond Volatility Index we notice that most of the recent rise is due to, you guessed it, an explosion in the volatility of euro denominated government bonds. In fact, euro government bond volatility is now right at two standard deviations higher than average.