Investors pile into bonds ahead of the next volatility spike

Investors yanked nearly $14 billion from stock ETFs amid several days of extreme swings in the market and funneled the money into bonds. Seeking safer assets during a down market is not uncommon but the broad buying is notable said Nicholas Colas, chief market strategist, at ConvergEx “They bought it across the board, not just short-term products but corporate products, high-yield products, high-grade products and so forth and they bought volatility ETFs as well.”

What’s also notable is the group of investors moving out of stocks into bonds and volatility ETFs, ironically Colas suggests this is a positive signal for stocks “We have a combination of not only hedge funds, which we kind of knew, but registered investment advisors and retail investors. What that signals, it seems so far anyway, is that bottom should hold for a little awhile.”

The extreme reversal in volatility over recent days confirms Colas’ view. The CBOE Volatility Index (VIX) has dropped to 16.7 after flirting with 30 last week. At the same time the S&P 500 (^GSPC) is clawing its way back registering gains of more than 3% over the past five days while the yield on the 10-year Treasury (^TNX) is back above 2%.

Still investors should not get too comfortable according to Colas who believes volatility is simply taking a breather. “What I think you are going to see for the rest of the year is more volatility and also more uncertainty geopolitically as well. The volatility will come from high stock valuations and the geopolitics we are seeing right now.” 

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