Since 1998, the correlation between bonds and stocks has swung positive, so when interest rates move higher, stocks do well and when they move lower, stocks do poorly. In a similar concept, we can relate movements in bond volatility to movements in the equity market. The MOVE index is the implied volatility of bonds and is expressed in basis points, but we convert it into a percentage (similar to the VIX). In the chart below, we compare the MOVE index percentage (left scale, inverted) to the S&P 500 (right scale). It is pretty clear that bond volatility is negatively correlated with stock prices. So, when bond volatility is on the rise, stocks tend to struggle.
The most interesting asset price move last week was not in the equity market, rather it was the 10 year bond, plunging well under 2% temporarily. Bond volatility has retreated some in the last week from 47% to 36%, but we wonder whether the fact that bond volatility is holding at higher levels is a signal the bond market is sending to equity investors to MOVE to the sidelines.
