The One Chart That Explains It All

I probably oversold this post with that title, but this chart will tell you a lot about what’s going on. Here you see the yield on the 30-year Treasury bond moving somewhat closely with the Morgan Stanley Cyclical Index (^CYC).

In other words, investors are taking on more risk. They’re leaving the safety of Treasury bonds while simultaneously raising the value of cyclical stocks.

What’s also happening is that the Volatility Index (^VIX) is falling. The VIX fell to 17.13 today. It was close to 50 in May.

Does this contradict the chart? I don’t think so. While the risk preference of investors is rising, the implied volatility is falling. These are two risk measures, but they don’t necessarily measure the same thing. “Risk” is one word we use for many different developments. My guess is that the lower volatility reading reflects that investors are more locked into the current trend and is not a judgment of what that trend is.

Posted by on December 7th, 2010 at 1:20 pm


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