US investors are paying the biggest premiums since October to protect their portfolios against market gyrations as mounting tensions in the Middle East and reduced expectations of interest rate cuts fuel a surge in volatility.
The Vix index, Wall Street’s so-called “fear gauge”, hit 19.6 this week, its highest level since October 20, two weeks after the Hamas attack that triggered Israel’s war in Gaza.
The metric measures the price of options that enable investors to profit from swings in the S&P 500.
As of Wednesday morning in the US, the index had receded slightly to about 18, still far higher than its late-March level of 12.6 per cent.
Market turmoil has also affected US bonds, with the ICE BofA Move index, which tracks volatility in US Treasuries, hitting 121, its highest level since early January and up from 86 in March.
US Federal Reserve chair Jay Powell also said on Tuesday it was likely to take “longer than expected” for inflation to fall to the central bank’s target level and make rate cuts appropriate.
While the Fed has indicated that it intends to make three quarter point cuts this year to interest rates, investors now expect just one or two reductions. In January, they had anticipated six.
The shift in rate expectations has hit bond markets, with yields, which move inversely to prices, rising sharply. That in turn has made equities less attractive to investors, since they can now earn a higher return than before from ultra-safe US Treasuries.
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