Something very interesting has been happening for the past several weeks: while stock traders and investors’ sentiment is beyond euphoric, bond traders and investors are freaking out.
Please take a look at this chart that includes the 10-year government bond yields of major countries and the VIX.
- The first remarkable thing we can observe is how, while both the VIX and yields spiked when the conflict in the Middle East started, the first then came back down to a “normal” level, but the second didn’t and overall continued to rise.
- The second remarkable thing is that, despite a war being an objective “risk-off” event, this time markets behaved in the complete opposite way with “risk-on” assets like stocks so far significantly outperforming “safer” government bonds or precious metals like gold or silver. This is a matter I already analysed in “OIL WILL DECIDE WHEN GOLD AND SILVER BOTTOMED” and “GOLD AND SILVER ARE FACING THEIR WORST ENEMY: A LIQUIDITY CRISIS” so no need to expand this topic further today.
- The last remarkable thing can be observed in the second chart below, where we compare the VIX, a measure of risk in stocks, and the MOVE index, a measure of risk in government bonds. As you can see, both are moving in tandem and, contrary to yields, the MOVE index followed the VIX closely instead
I believe some of you might now be willing to say: “Ehi, if the MOVE came down a lot too, that means bond investors aren’t freaking out at all”. Not so fast. Since the US Treasuries Buyback programme was launched in 2023 by Janet Yellen (”Treasury to Launch First Buyback Program Since 2000”) the ultimate goal was to force a hard cap on US Treasury yields. As a consequence, from a trading perspective, since then, it has been a very profitable trade to short government bond volatility because the artificial cap on yields so far assured volatility couldn’t “explode” and any temporary rise, like the one at the start of the war in the Middle East, was just another opportunity to exploit.
Then why are bond investors “freaking out”? Because, unlike traders who exploit quick moves in the market and can arbitrage volatility, Fixed Income investors, who tend to buy and hold until maturity, are having a hard time making money in a market currently in a downturn for SIXTY NINE consecutive months – the longest slump EVER RECORDED. Furthermore, everyone is aware that not only can volatility not be suppressed forever without consequences on markets and the real economy (big lesson from Japan here), but bond investors cannot afford to ignore rising geopolitical tensions and the rising problems in the credit space, especially private credit, as I recently discussed again in “THE PRIVATE CREDIT IMPLOSION WILL TRIGGER A GREATER FINANCIAL CRISIS.”
The whole fixed income and FX space is literally a disaster waiting to happen, and there have not been so many triggers close to igniting the blast at the same time:
- Japan: runaway inflation is pushing JGB yields higher and higher, but the BOJ is still forced to keep interest rates artificially too low and continue printing money, ultimately impacting the JPY that can only be kept under control via FX market interventions (“Japan steps into FX market for first time in two years to boost yen”)
- US: expanding government deficit that requires more and more debt financing to remain sustainable (“Bond Traders on Watch for Bessent to Signal More Debt Is Needed to Finance Deficit”)
- UK: Yesterday, GILT yields hit a 1998 peak, a level already beyond the one that triggered the pension funds and insurance companies crisis in 2022 and is now threatening to bust another government that is failing to manage the problem (”UK borrowing costs surge to highest since 1998 as bond market braces for election fallout”)
What we’re seeing is a big disconnect: stock markets look calm and confident, while government bonds are quietly sending a warning signal. Rising bond yields mean governments have to pay more to borrow, and that matters because borrowing costs flow through the entire economy: mortgages, business loans, and, eventually, jobs and growth.
At the same time, measures of bond-market stress may look “contained” on the surface because a lot of trading has been built around the idea that policymakers can keep yields from moving too far, for too long. But caps and interventions don’t remove the underlying problem; they mostly delay it, and when reality pushes hard enough, the adjustment tends to be sudden rather than smooth.
The core message is simple: bonds are pricing in a world where risks are rising (geopolitics, inflation uncertainty, heavy government borrowing, and cracks in credit), even if stocks are still partying. If yields keep climbing, something eventually has to give: either inflation cools, and growth slows, policy becomes more supportive, or markets reprice “risk-on” assets to reflect tighter financial conditions.
So, whether you’re a trader or a long-term investor, this is not the time to assume that low volatility equals low risk. It’s the opposite: when the bond market starts flashing orange while equities stay euphoric, it often means the real stress is building in the background, and the next move can be driven by forces most people aren’t watching yet.