Financial markets are eerily quiet in mid-2017.
Stocks continue to grind ever-higher, seemingly hitting record-highs each and every day, while currencies, after a flurry of activity earlier in the year, are also quietening down.
Much of that is due to a lack of volatility across bond markets, the largest and most influential factor across broader financial markets.
Put simply, when they’re not doing much, other asset classes tend to follow suit.
Nothing demonstrates the northern hemisphere summer doldrums in bonds than the chart below from Capital Economics.
It shows the 30-day moving average of expected volatility in 2, 5, 10 and 30-year US treasury yields looking one month ahead, overlaid against benchmark 10-year US note yields.
It’s essentially the same thing as the VIX index for stocks, referred to in some parts as the “fear index” for investors.
Unsurprisingly, like other asset classes, expected volatility in US bond yields is next to non-existent, remaining close to the record lows struck in late July this year.
Fear is nowhere to be seen, a curious outcome to some given the likelihood that the US Federal Reserve is likely to begin normalising its balance sheet later this year, coinciding with growing expectations that the European Central Bank will also begin to reduce the size of its monthly asset purchases.
Given those risk events — well telegraphed by policymakers — some investors are understandably questioning whether the lack of market concern is currently mis-priced.
To John Higgins, economist at Capital Economics, it’s not, suggesting that just because volatility is so low does not imply that a sudden rise in yields inevitably lies around the corner.
He thinks that while yields are likely to move higher in the period ahead, the moves are likely to be gradual in nature, keeping volatility in bond markets at levels lower than usual.
“We forecast that the 10-year yield will rise to 3.25% next year, from about 2.25% now, as the Fed tightens monetary policy by more than investors are discounting. But we anticipate that the rise in the yield will be fairly gradual, with the result that volatility generally stays low by the standards of the past,” he says.
Given the influence of bond markets on broader financial markets, if Higgins is correct, that suggests the recent lack of movement across markets could become the norm, rather than the exception.