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There’s a LOT going on these days, and yet the stock market keeps climbing and climbing. That has baffled a lot of people. But the real conundrum is arguably the remarkable calm of the bond market.
The best way to demonstrate this is with the MOVE index. The “Merrill Lynch Option Volatility Estimate” tracks the expected near-term volatility of US Treasury bonds, as implied by option prices, and is the bond market sister of the US stock market’s more famous VIX index.
The MOVE index hit 76.77 yesterday, its lowest reading since the beginning of 2022, and roughly half the level it hit at the peak of the post-Liquidation day market mayhem in April.
Sure, it remains far above the lows seen after Covid-19, when interest rates were pinned near zero and the Fed was hosing the Treasury market with money, or the pre-pandemic lows. But it’s still a pretty noteworthy decline, given the cross-currents that the bond market still faces.
While the stock market is being dragged higher by the AI hype, the US government debt market is facing the ebb and flow of stubborn inflationary pressures, probable but uncertain rate cuts, massive issuance, unpredictable central bank leadership, and wary foreign investors.
And yet:
Financial journalists get excited about low readings for volatility gauges like MOVE and VIX. “It’s quiet out there — TOO quiet” is the cliché that often gets trotted out. The reality is that these volatility gauges are terrible indicators and say next to nothing about the immediate outlook.
But the recent decline of rates vol feels a little complacent, and mystifying. What is behind it? Well, it depends a little on who you ask.
Barclays’ rates derivatives analysts say that it mostly reflects the fact that the Trump administration’s “One Big Beautiful Bill” has now been passed, giving investors at least some clarity on the fiscal outlook . . .
We think that over the past year realized volatility, as well as short expiry volatility, may have been kept elevated by concerns around Treasury supply and fiscal sustainability contributing to rate moves. But with the OBBB having passed, and tariff revenues acting as a significant offset to the fiscal expansion in the bill, these concerns have also faded. That is the most likely reason for the current low volatility.
. . . and the fact that analysts are in unusual agreement on the near-term economic outlook:
The low realized volatility is also supported by the fact that there is not a whole lot of disagreement in the market about key variables like inflation, Fed policy or 10y yield forecasts. In fact, our forecast dispersion-based models of realized volatility suggest that the fundamental backdrop for uncertainty (as measured by Q3 2025 1y ahead forecast dispersions for factors like 10y yields, inflation, policy rates) is currently not that different from pre-pandemic levels.
Then there are potential technical factors, such as systematic vol sellers — investors that generate income by selling insurance against sharp moves — having an impact on both implied and realised Treasury volatility.
Rick Rieder, chief investment officer for global fixed income at BlackRock — and now apparently a candidate for the Fed chairmanship — offered up another interesting rationale in MainFT last month. He argued that calm reigns because “the US has quietly become one of the world’s most shock‑resistant economies”.
That resilience not only supports equities, it also lets investors lock in once‑in‑a‑generation income on high‑grade bonds that serve as a ballast alongside riskier positions.
Markets are not ignoring risk; they are pricing a system built to absorb it. A service‑oriented economy, fortress balance sheets, and a liquidity‑rich investor base deliver a two‑for‑one: resilient growth and elevated fixed income yields.
Alphaville is very much inclined to agree that the US economy is not nearly as vulnerable to shocks as has often been feared over the past 10-15 years. It takes a lot to really shake it off its axis.
However, we can’t shake off the fear that ‘shock-resistant economy’ and ‘agreement on less uncertainty’ are precisely the kinds of things people write just before something goes 💥💥💥.