The implied volatility of US debt tracked by the ICE BofA MOVE index is now close to its highest level since April last year, while similar indicators in Europe have reached their highest level since June. This is due to the prospect of a massive government stimulus package and the gradual start of COVID-19 vaccination, which has raised traders' expectations for global economic growth.

Major central banks are also starting to notice. Christine Lagarde, president of the European Central Bank, said on Monday that the ECB was "closely monitoring" the government bond market. Over the past two weeks, the ECB has also accelerated emergency bond purchases, suggesting that the central bank is conscious not to let yields rise too fast because it could lead to tighter financial conditions.

Is the long-term debt afraid of a long-term bear market?

Larry McDonald, author of the bear market trap report (Bear Traps Report), pointed out that after this week's surge, the MOVE index has reached its highest point above the 200-day moving average, a breakthrough that confirms that US debt is in a long bear market, and warns that looking back at the five-year history, there is still a lot of room for US bond volatility to rise.

The chart shows that the last time the MOVE index reached this level was on election day in the United States, when the VIX was 35 (now 22).

Nomura Securities Masanari Takada previously calculatedIf the sell-off starts to accelerate and CTA turns to short futures, volatility will push 10-year yields above 1.5 per cent and force the S & P 500 down 8 per cent or more.

Stuart Kaiser, head of equity derivatives research at UBS Securities, believes that as anxiety spreads in every corner of the market, if current interest rate volatility continues to expand, then the "panic criteria" of the S & P 500 will catch up.

Bond volatility may lead to stock market volatility

According to Keiser, while the VIX index depends only on a small number of S & P 500 options, not directly on Treasury yields, there is still a link between stock market volatility and interest rates because increased anxiety in one area of the market could eventually lead to similar anxiety in others.

MOVE charts related to VIX show that interest rate volatility rose 1/4 in the five days to Monday, while the panic index VIX hovered near the lows of the past few months.

The reason for the low VIX is "reflation" trading, which increases the diversification of individual stocks and suppresses index volatility, and people are optimistic that the impact of inflation on stocks is not as scary as on the bond market.

But Keiser believes that although it is difficult to predictBut if US bond yields rise by another 25 basis points, you may have to worry about a clear reaction to VIX in US stocks.