Falling interest rate volatility in Treasuries could herald a stock market rally.
There are few things that make investors happier than having clarity about where the markets are today and where they’re likely headed. And thanks to some recent bond market trends, investors may have reason to feel pretty happy.
Here’s why: In what is potentially a very big deal, the daily volatility of the 2-year U.S. Treasury note’s yield has plummeted by 9 basis points—from a high of 15 basis points during the banking crisis earlier this year to just under 6 basis points today, as seen in the chart.
As we’ve pointed out, falling interest rate volatility can set the stage for risk assets such as equities to rally because lower levels of rate volatility can give investors greater confidence in stock valuations. The recent slide over the past few months means the 2-year Treasury’s volatility level has fallen back to where it was in March 2022 (when the Fed began its aggressive campaign of inflation-fighting interest rate hikes) and is now much closer to its long-term average of 5.5 basis points per day.*
Another encouraging bond market sign: The MOVE index—which essentially measures expected future rate volatility among Treasuries—recently dipped below 100 (which implies a move of approximately 6 basis points per day) for the first time since February and is inching closer to its historical average of 89.
None of this means a stock market rally is a sure thing, of course, and other factors (such as oil prices continuing to rise) could put a damper on equity prices. But if realized and expected bond market volatility stay on their current paths lower, stock investors may finish strong in the final months of 2023.
*measured from January 1990
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This commentary is written by Horizon Investments’ asset management team.
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