Interest rate concerns are triggering risk-off sentiment in the equities market and fueling bets on the CBOE Volatility Index, along with VIX-related exchange traded products.
On Friday, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) rose 10.2%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) gained 10.3%, VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) increased 10.0% and REX VolMAXX Long VIX Weekly Futures Strategy ETF (BATS: VMAX) advanced 10.8%. Meanwhile, the VIX jumped 14.9% to 15.5, its highest level since August.
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Robust U.S. jobs data pushed bond yields higher and added to rising speculation of more interest rate hikes this year. The Labor Department revealed that nonfarm payrolls increased by 200,000 in January, compared to expectations of 180,000 new additions, while average hourly earnings rose and boosted the year-over-year increase to 2.9%, its largest increase since June 2009, Reuters reports.
In response to the improved employment numbers, yields on benchmark 10-year Treasury bonds rose to 2.84% mid-Friday as traders increased bets that the U.S. Federal Reserve will raise rates at least three times this year to fight the rising inflationary outlook.
“I’m calling it the financial game of chicken. Who moves first? If the bond market keeps moving like this, the stock market cannot ignore it,” Nomura fixed-income strategist George Goncalves, told CNBC. “If it keeps nudging rates, ultimately there’s going to be a competition between stocks and bonds. Among the things that could stop this sell-off [in bonds]are either an equity market correction or value investors come in and the [Treasury] auctions are good next week.”
The higher yields are already causing unrest in riskier equity assets, with some observers arguing that the recent volatility could signal a pullback that could take stocks several percent lower before bargain hunters jump back in.
“We’re definitely at more risk in the last three days. We’re seeing wild fluctuations, volatility. … If you look at the 10-year interest rates, it looks like they’re going higher. Then we’re getting concerns of inflation, gold is strengthening up. … I think what you’re seeing is overall interest rate concerns.” Paul LaRosa, chief technician at Maxim Group, told CNBC, projecting that the 10-year chart looks like yields could move as high as 3.25 percent by year end.
For more information on the CBOE Volatility Index, visit our VIX category.