Treasury prices climb higher despite inflation concerns
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The 10 Year Treasury Yield has been declining since Feb 15th despite rising concerns over inflationary pressures. It is notable that investors are pushing bond prices up, and lowering yields, even in the face of higher expected interest rates.
Recent wars and conflicts often have little to no impact on US company fundamentals (with the exception of a few defense and energy companies). However brief equity sell-offs still occur because of an emotional reaction to foreign conflict. In 2002 and 2003 there were small sell-offs, the longest lasting 4 weeks in August 2002, around North Korea’s multiple nuclear missile launches until reconciliation talks started at the Winter Olympics in Seoul.
As if we needed confirmation of fear in the markets, the VIX has been telling a similar story since Feb 14th. This Valentine’s Day, the VIX broke above 30 (the extreme fear level) and has remained elevated since then. While we attribute the past two weeks market action to the emotional images from Ukraine, the market was already poised for panic mid-February. The VIX remained above 30 every day last week.
Putting yields, markets and the VIX in historical context, we know that conflicts and fears do not tend to last long and the rebounds are often as swift as the declines. Historically when the VIX is above 30, the average daily move is 2%, either up or down. Slightly more often (54%) to the downside. The past week’s S&P 500 actual price changes were relatively muted compared to the what the futures market were indicating.
Also, once the VIX moves above 20, the VIX usually remains elevated around 1 to 3 weeks. The VIX moved above 20 on Feb 10th. We’ve been in high volatility range longer than normal (if you didn’t already feel that way). War can extend the extreme fear periods. The emotional roller coaster dissipates as we can better assess the potential for US stocks to grow profits.
The Federal Reserve meeting on March 13-14 is a key date this month that will likely resolve a significant amount of uncertainty. We expect the action of the Fed and their guidance to help clarify the direction and pace of the bond markets and as a result the equity markets.
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