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Implied Volatility and US Treasury Yield Ratio

The implied volatility of the SPX Index or the CBOE Volatility Index (VIX) represents the market expectations for the near-term price changes of the SPX Index. Derived from the prices of the near-term expirations of SPX options, it shows the 30-day forward projection of SPX volatilities. Volatility is how fast prices change over time. VIX Index is a gauge of market sentiments, hence the fear indicator. When VIX rises, it signals a fearful or pessimistic stock market outlook. When VIX decline, it signals a confident or optimistic marketplace.

Treasury bond yields or interest rates are significant for many reasons. It conveys investor sentiments and the health of the economy. Since US treasuries carry the full backing of the US government, it is one of the safest investments.

The benchmark 10-year Treasury yield (TNX) is a proxy for lending rates, including mortgage rates. A rising yield environment indicates falling demand for treasury bonds, suggesting investors' preference for higher-risk and higher-reward investments (i.e., stocks, commodities, etc.).

A declining yield implies investors seek safety and low-risk investments. Fluctuations in TNX can offer great insights into investors' confidence in the economy and financial markets.

Dispersions in interest rates can warn of structural changes in the economy and investment psychology.

In the past year, the increase in market volatility, dislocations in financial assets, and erratic sector rotations suggest an impending inflection. Although the SPX Index and other indexes staged strong rallies to start the new year, geopolitical turmoil, Fed tightening policy, inflationary pressures, and recession fears continue to dominate headline news.

A ratio analysis between the S&P 500 Implied Volatility Index (VIX) and the yield on the 10-year Treasury bond (TNX) can offer insights into the state of the economy and the mindsets of investors.

Historically, when the ratio rises via the VIX rising and the yield declines, this suggests growing concerns or increased risks of the weak economy and bearish stock market tendencies. On the other hand, when the ratio falls via the VIX declining and the yield rising, this implies increasing optimism in the economy and bullish stock market tendencies.

Since 2009, or the end of the global financial crisis, there have been three occurrences where the VIX/TNX ratio (currently at 0.52) has violated its uptrends, suggesting an increase in optimism and bullish stock market tendencies. The breakdown in the ratio led to SPX price breakouts and ignited explosive rallies (i.e., 2013, 2016, Oct 2020).

However, as we fast forward to the beginning of 2022, the VIX/TNX ratio broke a 2018 uptrend, and the ratio declined over the past year. Instead of staging a rally, SPX has suffered a bear market decline (-27.54%).

Why is this time different from past occurrences?

Is the breakdown the result of the TNX rising faster than the VIX declining?

The longer-term trend in the US stock market (SPX) remains a structural bull trend (May 2013 structural breakout above 1,576). It is reasonable to expect any SPX pullbacks to be either a deep correction or a cyclical bear decline but not the dreadful structural bear market.

Nonetheless, continued geopolitical uncertainties, Fed-rate-hike, inflationary pressures, and recession fears can lead to further market volatilities into the year.

Can SPX continue with its Oct 2022 rally until the VIX/TNX ratio reaches its long-term support near 0.37-0.42 (2008, 2010, 2011, 2014, 2017, and 2018 lows)?

Source: Chart courtesy of

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