Why the Fear Gauge Still Isn’t Flashing Red Despite the Market’s Bond Woes

The Cboe Volatility Index was trading at 15 on Thursday, despite worries about bond yields and the war in Iran. (TIMOTHY A. CLARY/AFP via Getty Images)

Elevated oil prices, a flare-up in inflation, and war in the Middle East ought to be a nasty combination for stocks. But Wall Street’s go-to fear gauge suggests investors are still feeling Zen.

The Cboe Volatility Index, or VIX, was sitting at just over 15 early Thursday, implying traders expect daily swings of less than 1% for the S&P 500. Readings of below 20 tends to signal relatively low volatility.

That doesn’t make sense. Soaring bond yields have put the market in panic mode lately, with the 10-year Treasury hitting its highest level since the start of President Donald Trump’s second term in office.

So the VIX should be flashing red—but it isn’t.

Created with Highcharts 9.0.1Cboe Volatility Index (VIX)Source: FactSetAs of Sept. 3, 8:45 a.m. ET

Created with Highcharts 9.0.1Aug. 24Sept.14.014.515.015.516.016.517.0

Part of the disconnect is down to the surge in popularity of exchange-traded funds that sell options. These keep a lid on the VIX, which measures uncertainty by tracking S&P 500 call and put contracts.

The fear index’s subdued level may also reflect a sense of complacency after large-cap companies posted another batch of strong quarterly earnings, in part thanks to the boom in artificial-intelligence demand.

The risk is that the focus could soon shift from corporate reporting to the economy. There’s a slew of data due out over the next two weeks, including Friday’s nonfarm payrolls report and a Sept. 11 inflation print.

The numbers will help decide the Federal Reserve’s next move—and if the central bank does hike later this month, bond yields will likely extend their run higher.

That’s a worrying prospect for the market—but perhaps the sort of jolt needed to get Wall Street’s favorite fear gauge working properly again.

Write to George Glover at george.glover@dowjones.com

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