Chart of the Week

Weekly chart using economic data to address timely market topics from the Wells Fargo Investment Institute Global Investment Strategy team.

February 22, 2018

George Rusnak, CFA, Co-Head of Global Fixed Income Strategy

Volatility Can Offer Opportunity When Markets Overcorrect

Volatility Can Offer Opportunity When Markets OvercorrectSource: Bloomberg, February 16, 2018. The MOVE Index is the Merrill Lynch Option Volatility Estimate Index, which is composed of over-the counter options for Treasury securities maturing in 2-30 years. It is a yield-curve-weighted index of the normalized implied volatility on 1-month Treasury options which are weighted on the 2, 5, 10, and 30 year contracts. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

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MOVE Index shows rising volatility in the U.S. bond market today

Since the beginning of 2018, the 10-year Treasury yield has increased by approximately 40 basis points, and interest-rate volatility has risen to levels we haven’t experienced since April 2017.1 We believe that this recent increase in rates and volatility is caused by bond-market participants recognizing that economic growth may be stronger than anticipated.

We have been in a low volatility and declining interest-rate environment for a number of years. We expect both yields and volatility to increase as the markets digest strong economic growth and higher rates. We believe that bond-market volatility will rise this year, which may present opportunities for active investors. However, we expect that interest-rate increases in 2018 will only be mild from current levels, given the low inflationary and global bond market conditions anticipated.

What it May Mean for Investors

While recent interest-rate and equity-market volatility have been concerning to some investors, we believe that it is important to prepare for a higher-volatility environment this year. Given this expected change, we believe that investors should actively rebalance their portfolios, buy quality holdings on market dips, broadly and globally diversify holdings across asset classes, and capitalize on potential market opportunities as they present themselves.

1 One hundred basis points equal 1%.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

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