The VIX is an important gauge of risk appetite. It rises when investors fear higher equity market volatility and falls when they become more bullish. It recently broke below 20 points for the first time since the start of the coronavirus pandemic, after hovering around that level since November.

This suggests that equity investors have turned more positive on the outlook - perhaps even becoming a little complacent, given ongoing concern over the pace of economic recovery and higher inflation. But the move in the VIX is complicated by a couple of technical factors.

Firstly, investors that use strategies which sell volatility (such as via buying ETFs which short VIX futures, or by selling put options) have not returned to the market in any significant scale since early last year. This created a supply-and-demand imbalance that supported the VIX. 

Secondly, traditional safe-haven assets, such as US Treasuries, had become expensive as yields plunged to record lows. Using put options to hedge against a fall in equities was comparatively more attractive than diversifying into these so-called safe-haven assets. The VIX level is derived from the market’s demand for puts, which stayed high since the pandemic began. But the recent rebound in yields has made Treasuries more attractive again, so we may be seeing a rotation in the choice of portfolio hedges.

US Treasuries priced in a more positive outlook for growth and inflation in recent months, and it appears the VIX has caught up with that view after the March options expiry cycle. The lower VIX indicates that equity investors are positioning for more good news ahead, and stocks can continue to do well if the rise in inflation is moderate and not disorderly.  

Eugene Philalithis

Eugene Philalithis

Portfolio Manager, Fidelity Multi Asset

Rahul Srivatsa

Rahul Srivatsa

Stuart Rumble

Stuart Rumble

Investment Director