The Market Is Underestimating Fed Risk Even After Rout: BofA

Mathematically, no strict tick-by-tick correlation between volatility gauges in stocks and other asset classes is present, but a conceptual link still exists. Jitters in markets elsewhere create conditions where the cost of hedging against swings in equities should go up.

That did happen — sending the VIX Index up by 6.2 volatility points since mid-August. Bank of America’s year-end forecast on the S&P 500, at 3,600, likely implies that a further jump in the fear gauge is in store — with the stock benchmark dropping nearly 10% from Tuesday’s close.

Concern about the stock-market complacency has somewhat eased in past week, with the VIX topping 25 after trading below 20 earlier this month.

But that’s still pale in comparison to a broad gauge of implied volatility in Treasuries, the ICE BofA MOVE Index, which saw few signs of dormancy during the S&P 500’s two-month rebound.

The ratio of the MOVE to the VIX smoothed over a 10-day basis, reaching 5.8 last week, the highest level since 2017.

The relative relationship between stock and bond volatility has been a subject of intense scrutiny this year, making the fair value of the VIX amid wilder swings in the front end of the Treasury market a point of heated debate that’s likely to continue.

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