After a protracted lull, volatility across markets has reawakened in April as Wall Street's "fear gauge" has surged to its highest level since Halloween.
The Cboe Volatility Index VIX, known as Wall Street's "fear gauge," traded as high as 19.56 on Tuesday, its highest intraday level since Oct. 31, bringing it to within a whisker of its long-term average of 19.60.
Volatility gauges tracking activity in options markets tied to Treasury bonds and major G-10 currencies have also shot higher this month.
The ICE BofAML MOVE Index, a measure of implied volatility of Treasurys, had reached a two-year low as recently as March 27. But the index has risen more than 40% since then to close at 121.15 on Monday, its highest level since Jan. 3, according to Dow Jones Market Data.
This uptick reflects investors' increasing uncertainty surrounding the outlook for interest-rate cuts by the Federal Reserve, as Fed Chair Jerome Powell confirmed on Tuesday that the central bank will likely hold off on plans to cut rates.
Now traders expect that the European Central Bank and others could beat the Fed to the punch, which has pushed Treasury yields higher while fueling a rapid advance in the U.S. dollar DXY in April, strategists said.
The dollar's advance has sent the JPMorgan G-7 Volatility Index, which measures the cost of hedging swings in major currency pairs, to its highest level since January, according to Bloomberg data.
Investors had pinned their hopes for stocks on strong earnings growth, strategists said. But even this has come into question, as earnings season has gotten off to a rocky start.
Markets looked quiet ... too quiet
As recently as last month, markets were looking tranquil, with many volatility gauges at or near notable lows.
However, some strategists saw signs of complacency in the calm, including Joseph Kalish, chief global macroeconomic strategist at Ned Davis Research.
"Things were very quiet," Kalish said. "But if anything comes in that's outside of what people were expecting, then you get big market reactions, which is exactly what we've seen."
In a note sent to clients and shared with MarketWatch in March, Kalish had recommended that traders buy straddles, an options strategy that pays off when volatility spikes. In retrospect, such a trade would have paid off.
VIX surge spurs demand for crash protection
Now traders are rushing into options-market hedges to protect themselves in case the latest bout of volatility persists. Rising implied volatility reflects increased demand for hedges across asset classes and currency pairs.
As the VIX has surged, demand for VIX-linked option contracts has risen with it. VIX options saw their highest trading volume in more than six years on Friday, according to Cboe data. The VIX's value is based on activity in options tied to the S&P 500 expiring over the next month.
Most of this spike in demand was centered on VIX-linked calls, which offer insurance against a sharp move lower in stocks.
VIX options have continued to see brisk trading this week as monthly options tied to the index expired early Wednesday, according to Danny Kirsch, head of options at Piper Sandler.
Many traders who held these calls scrambled to take gains before rolling their positions into contracts with more time left until they expire, Kirsch said. Others are buying puts to try to profit from implied volatility's tendency to see short-lived spikes that quickly fade.
Bond volatility darkens outlook for stocks
Signs of more turbulence ahead in bond markets could bleed into stocks, which have struggled as Treasury yields have risen to their highest levels since November.
"In terms of equities, this higher bond volatility generally isn't a very risk-friendly environment," Kalish said during an interview with MarketWatch.
Corporate-bond markets could also offer investors clues about where stocks are headed. Credit spreads on high-yield bonds are often correlated with the VIX, Michael Kramer, founder of Mott Capital Management, said during a phone interview with MarketWatch.
Data from the St. Louis Fed show high-yield credit spreads have risen modestly in April after falling to their lowest level since late 2021 last month.
According to Kramer, this is likely the beginning of a more protracted move.
"If you continue to see credit spreads moving higher, you'll continue to see the VIX going up, too," Kramer said. "This implies that stocks will go down."
U.S. stocks traded mixed on Wednesday, with the S&P 500 SPX and Nasdaq Composite COMP on track for their fourth day in the red - what would be their longest losing streaks since January, according to Dow Jones Market Data. The Dow Jones Industrial Average DJIA, meanwhile, looked set to finish higher.
Treasury yields were lower on Wednesday, with the 10-year BX:TMUBMUSD10Y off 7 basis points at 4.59%. The U.S. dollar index DXY was off 0.2% at 106.04 one day after touching its highest level since Nov. 1.
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