Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Stock and Bond Market Volatility Diverges on ‘Blue Wave’ Bets

Published 16/10/2020, 15:46
Updated 16/10/2020, 16:09
© Reuters.

© Reuters.

(Bloomberg) -- With 18 days to go until the U.S. election, growing odds that Democrats will take control of the White House and the Senate is sending volatility gauges for stocks and bonds in opposite directions.

The Cboe Volatility Index -- known as the equity market’s “fear gauge” -- has been relatively subdued this month. That’s at odds with the U.S. Treasury market’s equivalent measure: The ICE (NYSE:ICE) BofA MOVE Index jumped by the most since March last week after languishing near record-low levels.

While bets on price swings are taking opposite tacks, analysts say that traders are wagering on the same story. With Democratic nominee Joe Biden comfortably ahead of Donald Trump in presidential election surveys and his party gaining ground in several Senate polls, the current calculus is that a so-called blue wave would unleash another round of economic stimulus -- pressuring Treasury yields higher. Meanwhile, anxiety over a contested result is easing on gauges of stock-market volatility.

“Markets are seeing the upcoming elections and any final word on stimulus as important data points on whether this will be a true inflection point for interest rates,” said Sameer Samana, Wells Fargo (NYSE:WFC) Investment’s senior global market strategist. “With the odds of a Biden win and a blue wave increasing, the bond markets sees increasing chances of larger stimulus.”

Benchmark 10-year Treasury yields touched the highest level since June last week as Biden’s lead in the polls widened, but have since retreated as stimulus negotiations seemed to deadlock. Still, five- and 10-year breakeven rates -- a proxy for inflation expectations and the chances of stimulus getting passed -- remain near recent highs.

Equity traders had been bracing for a too-close-to-call election, with implied volatility elevated long after the vote itself. But those fears have ebbed as Biden’s polling lead grows, with UBS Group AG (SIX:UBSG) noting this week that election-risk premium is at its lowest since March.

Currently, PredictIt’s market for betting on a Democratic sweep -- winning the presidency, keeping control of the House and taking control of the Senate -- shows odds of roughly 57%.

“In the equity market, what investors care about is a close or contested election,” said Credit Suisse (SIX:CSGN) Group AG’s Mandy Xu in a Bloomberg Television interview Thursday. “As the probability of a Democratic sweep goes up, that risk premium has come in.”

©2020 Bloomberg L.P.

 

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.