Wall Street’s fear gauge, the CBOE Volatility Index, has remained quiet despite the market’s recent choppiness on fiscal cliff fears and Europe’s debt crisis flaring up again. However, popular high-yield bond ETFs are telling a different story.
The VIX fell 7% during Monday’s stock rally and is hovering near multiyear lows. The index tracks S&P 500 options to measure the market’s expectations of volatility for the next month, and tends to rise when investors panic.
The VIX is almost “sleepwalking” and even the entire post-election sell-off in domestic stocks couldn’t get the fear index to its long term average of 20, says Nicholas Colas, ConvergEx Group chief market strategist.
Rather, it is U.S. high-yield bonds where options traders see the greatest potential for increased volatility in coming weeks. The implied volatility for this asset class is up 64% over the past month, versus an essentially flat VIX over the same period, he notes.
‘Tis the season
There are several exchange traded products designed to track VIX futures contracts. They let investors hedge long portfolios or speculate on market pullbacks. The largest one, iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), slipped to a new all-time low on Monday. [‘Subdued’ VIX ETFs Suggest Complacency]
“Part of this, truth be told, is seasonal. In point of fact the last two weeks of December are rarely a period of outsized volatility. Options traders know this and rarely bid up volatility ahead of these end-of-year doldrums,” Colas wrote in a note Tuesday.