Bond Volatility Is Sending A Warning

The recent rise in oil has spilled over into rates, with bond volatility beginning to respond. While the MOVE Index remains well below panic levels, the recent acceleration is worth monitoring given its historical relationship with equities.

Rates have continued to climb, flirting with a major breakout. The initial move higher was accompanied by unusually complacent bond volatility, but that has started to change. The MOVE Index has caught a strong bid recently, marking its largest cumulative advance since mid-May.

The oil squeeze is spilling into rates, and rates are beginning to spill into bond volatility. But unlike the initial oil panic, the MOVE Index is reacting in a far more orderly fashion, a sign the bond market isn't pricing a full-blown shock just yet.

Both the MOVE Index and the VIX have moved higher lately, but the rise in bond volatility has been considerably more pronounced. It's another sign that stress is building first in rates.

Equities rarely enjoy sharp spikes in bond volatility. Historically, equities have struggled when bond volatility accelerates. For now, stocks remain relatively resilient, but that divergence may not persist if the MOVE Index continues to climb.