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Will increasing long-term bond yields trigger equity volatility?

We could be approaching an inflection point where the excess return expected from equities over rising 10-year bond yields is deemed no longer worth the risk
Will increasing long-term bond yields trigger equity volatility?

Markets have been peculiarly tranquil of late - or so it seems. Both the FTSE 100 VIX and the Chicago Board Options Exchange Volatility index, which tracks expected volatility through options pricing, have been testing their five-year lows throughout the first quarter of 2017. Many have been surprised that these 'fear gauges' have been becalmed for much of the past year, particularly given growing political instability and doubts over the quality of underlying earnings here and in the US.

But there are signs that matters could be about to change on that score due to rising US bond yields and the end of the 'phoney war' following the EU referendum. Post-Brexit jitters are likely to play out over the coming months, although it might be a 'slow burn' due to the inherent complexity of the negotiations. However, the first point is worth examining for its potential to throw equity markets out of kilter in the near term; a point not lost on fund managers.

 

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