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News & Views

Provided by the Investment Professionals of Frost Investment Advisors | December 13 , 2021

Rocking into Christmas

Equity Market Volatility Spikes with Bond Uncertainty

Volatility for both the fixed and equity markets has increased recently, shown in the Move Index and the VIX in the chart below. Quarter-to-date, the yield on the U.S. 2-year Treasury note has more than doubled from 0.27 percent to a high of 0.69 percent last week, reflecting market expectation of an increasingly hawkish response to inflation from the Fed. The divergence between the Move Index and the VIX is stark, seeming to imply a lack of market consensus on future expected risks. This heightened uncertainty likely has three main causes: the effects of rising inflation, the ebb and flow of a recurring virus, and the guesswork relating to the Federal Reserve’s actions. The Fed is walking a tightrope between its dual mandates of promoting maximum employment and stabilizing prices. As the inflation numbers continue to be reported at elevated levels, we expect this will continue.

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