Why Higher Treasury Yields Haven’t Broken Risk Assets Yet
Executive Summary
Despite a significant repricing of U.S. Treasury yields in recent weeks, equity and credit markets have remained notably resilient. The explanation lies not in yield levels themselves, but in the behavior of rate volatility — specifically, the ICE BofA MOVE Index. As long as the rise in yields remains orderly and correlated with identifiable macro drivers like oil, risk assets can absorb the pressure. The danger arrives when yield moves become disorderly, unpredictable, and disconnected from fundamentals; a regime shift that appears contained for now but cannot be ruled out.
The Bond Market’s Fear Gauge
To understand why markets have held up, it helps to start with the right measuring stick. The MOVE index — the Merrill Lynch Option Volatility Estimate — is to the rates market what the VIX is to equities. It captures implied volatility across U.S. Treasury options, typically focusing on one-month expiries, and reflects how much the market expects yields to move, not simply where yields are trading.
Critically, the MOVE index has historically shown strong correlation with credit spreads, making it one of the most reliable leading indicators of broader risk appetite. When the MOVE spikes, credit spreads tend to widen, and risk assets come under pressure. When it remains contained, markets can absorb higher yields with relative composure.
Then vs. Now: MOVE Index in Context
The contrast between today’s environment and the rate cycles of 2022 and 2023 is instructive. During that period, the MOVE index surged dramatically, at its peak in October 2022 it reached levels above 160, and it remained persistently elevated through early 2023 as markets grappled with a fundamental regime shift in inflation and extraordinary uncertainty around the Federal Reserve’s reaction function. The combination of rapidly rising yields and explosive rate volatility delivered a double blow to both equity and credit markets.
Today’s picture is meaningfully different. While the MOVE index has drifted higher year-to-date, reflecting a market that is not complacent, both realized and implied volatility have remained relatively contained compared to those prior stress episodes. Large daily swings in Treasury yields have been notably scarce, and the moves that have occurred have tracked closely with oil prices, suggesting a degree of rationality and macro coherence rather than the kind of disorderly, sentiment-driven repricing that forces forced selling across asset classes.
Why Calm Has Persisted and What Could Break It
Beyond the macro narrative, there are structural and technical factors suppressing volatility. Quantitative Investment Strategies, systematic funds that algorithmically manage options exposure, have recently maintained a bias toward selling volatility, providing a mechanical dampener on implied vol even as yields have moved higher. This kind of flow-driven suppression can persist for extended periods, but it also means volatility can snap higher quickly if the positioning unwinds.
The relative tranquility is not unconditional. Several scenarios could catalyze a disorderly move in yields — one that would drive the MOVE index materially higher and, with it, wider credit spreads and weaker risk assets. An escalation in geopolitical conflict, evidence of significant second-round inflation effects, or a perception that policymakers are falling behind the curve or behaving unpredictably could each introduce the element of dislocation currently absent from the market.
For investors navigating this environment, the MOVE index itself serves as a critical signpost. As long as it remains range-bound the current resilience in equities and credit is defensible. Tactically, investors may consider maintaining risk exposure while hedging against a volatility spike through options structures that benefit from a sharp MOVE index re-rating.
The intermediate part of the curve is also favorable, with 5- to 7-year duration over 20- to 30-year duration. One may also want to maintain exposure to TIPS, given elevated inflation uncertainty, and overweight high-quality investment-grade credit while spreads remain stable.
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