Investors Turn to Bonds as Volatility in Stocks Rises

As U.S.-China trade talks appear in limbo, investors are turning to bonds for safety while volatility rises as evidenced in exchange-traded products (ETPs) like the VelocityShares Daily 2x VIX Short-Term ETN (NasdaqGM: TVIX).

TVIX was up over 32 percent. Meanwhile, the return of volatility paved the way for investors fleeing to the safety of government bonds as yields fell and prices for Treasury debt went higher.

“The stock market had held an optimistic view towards U.S.-China trade, likely pricing in an end to negotiations. But the sudden resurgence in trade tensions has forced it to grapple with uncertainties, such as the risk of the talks taking an unforeseen turn,” wrote strategists at Goldman Sachs.

TViX seeks to replicate the returns of twice (2x) the daily performance of the S&P 500 VIX Short-Term Futures index. The index was designed to provide investors with exposure to one or more maturities of futures contracts on the VIX, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve. The ETNs are linked to a multiple (2x) of the daily return of the index and do not represent an investment in the VIX.

Meanwhile, the volatility rained down on U.S. equities and saw the Dow Jones Industrial Average fall as much as 600 points before settling for a 473-point drubbing at the close of Tuesday’s trading session. It was the Dow’s worst loss since January 3 as the wall of worry got taller over U.S.-China trade talks deteriorating.

U.S. President Donald Trump threatened to impose a higher an increase in existing tariffs on Chinese goods on Friday with the hope that it will force China’s hand in relenting to a trade deal. Various reports reveal that China has been waffling on its negotiations with the U.S., which caught the ire of President Trump, causing him to send tweets that roiled the markets.

“From an equity market perspective, the immediate focus is on the two-day talks scheduled to take place between the U.S. and Chinese officials,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management. “However, it is difficult to imagine the two parties resolving their differences in just two days of talks. The markets may have to begin pricing in the trade conflict as a long-term factor once again.”

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