What does diverging volatility mean for investors?
Our chart shows implied volatility in the US Treasuries market (MOVE Index) and the S&P 500 (VIX Index) since the fourth quarter of last year until today. It demonstrates how the recovery in asset prices year-to-date has occurred in the context of falling volatility.
However, while the two tracked closely during the sell-off in Q4 2018 and the ensuing recovery in Q1 2019, they have begun to diverge more recently. This reflects the pickup in realised short-term volatility in the bond market, whereas equity markets have been less volatile than usual recently. A persistence of this divergence has important portfolio construction consequences, as it challenges the beta assumptions between bonds and equities. Dynamic risk management is key in such a situation, as it can incorporate such a dislocation and adjust portfolio exposures accordingly.
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