Macroscope | Opinion: Mysterious trends in the bond market could be warning of trouble
There’s an alternative market narrative to the current blissful state of mind derived from sinking global bond yields and low volatility
Another day, another sign of just how calm global financial markets have become.
On Monday, the Vix index, Wall Street’s so-called “fear gauge” that reflects investors’ expectations of volatility in the benchmark S&P 500 Index over the next month, dropped to its lowest level since February 2007, a year-and-a-half before the global financial crisis erupted.
The big question is why bond yields remain low in the face of, what even the International Monetary Fund now admits is, an improving economic outlook
The Vix fell to a post-crisis low just as stock markets, as measured by the MSCI All-Country World Index, which tracks companies in 46 countries accounting for 85 per cent of the investable equities market, reached a fresh high, buoyed by expectations that Emmanuel Macron, the centrist candidate in France’s high-stakes presidential election, will win the run-off on Sunday.
Investment strategists are increasingly baffled by the extent of the decline in financial volatility in the face of a plethora of risks that could roil markets, such as the recent escalation in geopolitical tensions, the withdrawal of monetary stimulus by the world’s leading central banks and, most recently, a much tougher regulatory environment in China.
Yet as Convergex, a US brokerage, notes, “there is an overwhelming market narrative that equates to ‘Don’t worry, be happy’.”
Among the oft-cited reasons for the remarkable calm are: