As we continue to navigate the complex landscape of interest rates, it’s worth examining whether the current levels of the MOVE index can be sustained. To better understand this relationship, let’s turn to the chart showing US 10-year breakevens versus bond volatility.

Firstly, it’s important to define the terms used in this analysis. The MOVE index is a measure of the expected volatility of the VIX index, which represents the market’s expectation of future volatility. Bond volatility, on the other hand, refers to the fluctuations in the prices of long-term government bonds. By examining their relationship, we can gain insights into the potential impact of bond market conditions on interest rate expectations.

A clear positive correlation between 10-year breakevens and bond volatility. As bond volatility increases, so does the expected break-even inflation rate. This suggests that when investors become more risk-averse due to increased uncertainty in the bond market, they demand higher returns to compensate for the increased risk. In other words, as bond yields rise, so do long-term inflation expectations, leading to higher breakeven rates.

However, it’s worth noting that this relationship is not fixed and can vary depending on various factors such as central bank policy, economic conditions, and geopolitical events. For instance, during times of monetary policy accommodation, the relationship between bond volatility and breakeven inflation may be less pronounced or even reversed, as lower interest rates can reduce inflation expectations and increase bond demand.