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1) On Friday, May 17, the VIX Index closed below 12 for the first time since 2019. Historically, the average VIX level when the S&P 500 is near its all-time highs is 14.8.
2) The inversion of the U.S. Treasury yield curve is typically a signal of a potential recession. On Friday, the VIX recorded its lowest closing level ever, with the 2s-10s curve again inverted in both real and nominal terms.
3) Contributing to the enthusiasm for risk appetite are the new highs reached by NVIDIA, exemplifying the success of Western technological innovation and overshadowing a slight slowdown in other areas of the economy.
VIX Levels and the 10-2 Year Yield Curve Inversion: An Anomaly in the Current Market Context?
The VIX closed below 12 on Friday for the first time since 2019, a notable event considering the S&P 500 hit a new all-time high of 5324, traditionally associated with lower implied volatility.
Several technical factors have pushed the VIX to such low levels, all pointing to a high level of comfort regarding risk appetite among managers.
VIX index
Impact of the Inverted Yield Curve
However, the inversion adds a layer of complexity to the current scenario. Historically, an inverted yield curve is seen as a signal of a potential economic recession. The 2-10 year segment of the yield curve is once again inverted in both real and nominal terms.
U.S. Yield Curve Slope in the 10-2 Year Segment (<0 = inverted)
Potential Market Reactions. NVIDIA’s earnings announcement is a significant event given the company’s enormous market capitalization growth in recent months. The results, published last night, confirmed the company’s success in every aspect: revenue, earnings, and dividends. To illustrate NVIDIA’s impact on the market, it has tripled its revenue from the same quarter last year.
Comparative Analysis of the VIX During Different Yield Curve Slopes. The VIX tends to behave differently depending on the yield curve’s slope. When the curve is inverted, the VIX levels’ distribution is more compact compared to when the curve is positively sloped. For instance, during inverted curve regimes, the average VIX level is 18.19, while it is 19.67 during positively sloped curve regimes. This compact distribution suggests limited extreme volatility when the curve is inverted.
VIX and Yield Curve Slope
Conclusion. The current low levels of the VIX and the inverted yield curve represent an interesting anomaly. With significantly positive events like NVIDIA’s earnings, the contained market volatility might not fully reflect the potential for future market movements. It will be interesting to see how these dynamics evolve and whether the current investor “complacency” is justified.
Warm regards,
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Federico Polese
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