Index Hedging Jumps, But Stock Optimism Persists

2026-05-18 14:11:00 ET

By Mandy Xu

Cross-Asset Volatility: Implied volatilities gained across asset classes last week as bond yields spiked on higher inflation expectations. The US 10-year jumped to a 1-year high of 4.6%, while VIXTLT Index gained 20 nms to 92 bps vol – though absolute levels of rates vol still remain low compared to previous episodes of inflation-driven sell-offs (e.g., VIXTLT Index still sub-100 vs. 115 in March at the onset of the Iran War, or 160+ in Apr’25 and 2022). Demand for protection, however, has picked up notably, with [[TLT]] 1M skew (25-delta ratio) steepening to the 98th percentile high (5Y lookback). Fed expectations have continued to turn more hawkish, with markets now pricing over 60% chance of a hike by year-end (vs. 6% a week ago). Stocks sold off on higher yields, with equity/rates correlation falling to near a 3-year low of -81% (see page 3 for more on cross-asset correlations). Equity, credit, and FX volatilities all gained (see pg 2), with the VIX® Index up 1.2 pts wk/wk to 18.4%. While oil prices jumped again last week on the lack of a resolution from the US-Iran War, oil volatility was relatively contained. Implied volatility, as measured by the OVX Index, ended the week unch’d at 72%, while WTI 1M realized volatility fell 22 pts to 58%....

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