The Volatility Index, commonly known as the "fear index," or VIX, may be confirming a long-term bond bear market. The VIX is not an indicator that is often used to gauge the bond market, mostly because we have been in an ongoing global bond bull market for over 35 years and the VIX has not been around for that long. Perhaps now, with the murmurings of a bond bear growing louder, it is finally time to do so.
How has the VIX provided evidence for an ensuing bond bear? For the first time since 1997, a massive VIX spike has not led to lower interest rates, at least not yet. In an overarching bond bull market, which we have been in for over 35 years since 1981, investors tend to pile into bonds during times of market stress as the “safe trade,” with the effect being lower interest rates. This has happened for every spike in the VIX since 1997.
The background of this possible bond bear is the Federal Reserve’s intended shrinking of its balance sheet at a time when congress and President Trump have agreed on annual trillion-dollar deficits for the next two years. The only thing missing from the bond bear picture is an obvious rise in price inflation. If and when that happens, the bond bear market could become obvious for all to see.
Looking back at the VIX for as far back as daily data go, during every major VIX spike since 1997, which I define as a spike of more than 100% to a target over 40, interest rates have fallen significantly. The data are as follows.
From Oct. 22-28, 1997, the VIX spiked 150% from 19.56 to 48.64. During that time, interest rates on the 10-year Treasury fell 41 basis points. From July 31 to October 8, 1998, the VIX rose from 22.11 to 49.53, or 124%. The 10-year yield plummeted 119 basis points during that time. Next was the period between May 29 and July 24, 2002. The VIX spiked 146% and 10-year rates fdll 91 basis points.
Moving on to the 2008 financial crisis, the VIX famously spiked to an all-time high of 80.74 on Nov. 21, 2008, from a low of 19.22 on Aug. 28 three months before. During that time, 10-year rates fell 74 basis points. 2010 saw a 211% VIX spike from April to May that saw a 69 basis-point drop. Finally, from August 14 to Black Monday, Aug. 24, 2015, the VIX spiked 316% and rates fell 32 basis points.
Back to the present, as we all know, Feb. 1-6 saw a 302% spike in the VIX, but interest rates on the 10-year were flat. They are still right near two-year highs. Yes, it’s only two weeks. Maybe we have a few scares to go yet and interest rates will drop just like they did before. Perhaps, but in any case this is something to watch out for as another confirmation of a bond bear market.
Disclosure: No positions.
