VIX Soars To 5-Month High: What Surging Treasury Yields Mean For Stocks

The CBOE Volatility Index, commonly known as the VIX or the “fear gauge” of the stock market, has experienced a notable upswing recently, reaching levels not seen in over five months.

This surge in the VIX, which has breached the psychologically significant mark of 20, serves as a compelling indicator of growing apprehensions within financial markets.

The VIX, a pivotal gauge of expected volatility in the S&P 500 provided by CBOE Global Markets Inc., experienced a surge of almost 13% on Tuesday, and is currently poised for its third consecutive weekly advance.

This spike has followed a month of substantial volatility, with September witnessing a 30% increase in the VIX, its most robust performance since April 2022. Notably, this came after the VIX had reached its lowest point (12.68) since January 2020.

The fear index has now exceeded both its 50-day and 200-day moving averages. The latter in particular constitutes a breach of what had been a formidable resistance hurdle since March 2023.

Chart: VIX Index Rises Above Key Moving Averages

VIX’s Ascent Amid Treasury Yield Rally

A primary catalyst behind this surge in the VIX is the remarkable rise in U.S. Treasury yields over the past month. The 10-year Treasury note yield has surged past 4.75%, attaining levels not seen since August 2007. Concurrently, yields on 30-year Treasuries have skyrocketed to 4.90%-4.95%, representing their highest peaks in 16 years.

As previously discussed, factors contributing to this surge in yields include a rising government deficit, the Federal Reserve’s quantitative tightening program, and a hawkish stance on interest rates.

When U.S. government bond yields increase, it signifies a decline in the value of what are often considered the world’s safest and most liquid assets, triggering reverberations throughout global asset classes. A notable example of this impact is the iShares 20+ Year Treasury Bond ETF TLT, which has plummeted by more than 50% from its levels in March 2020.

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Chart: Treasury Yields Rocketed To 16-Year Highs

Equities Feel The Yields’ Impact

As U.S. government bond yields climb, their influence extends beyond the bond market, creating ripple effects in the stock market.

Many companies and sectors rely heavily on low or stable market interest rates to sustain their operations and profitability.

As highlighted in a recent note from Goldman Sachs, lower interest expenses and corporate tax rates have contributed to over 40% of real growth in corporate profits from 1989 to 2019.

Consequently, the shift from a pre-pandemic environment of low interest rates to one marked by elevated rates and robust inflation presents a headwind for growth stocks, according to Goldman Sachs analysts.

The stock market is currently recalibrating itself to accommodate a prolonged era of heightened interest rates and sustained inflation, which, in turn, is propelling volatility.

Although the VIX itself isn’t a tradable instrument, there are several exchange-traded funds (ETFs) available that provide investors with exposure to stock market volatility. These ETFs include:

• Proshares Trust VIX Short-Term Futures ETF VIXY
• Proshares Trust VIX Mid-Term Futures ETF VIXM
• 2x Long VIX Futures ETF UVIX

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