Monday, December 22, 2008
These four charts represent different measures of the degree of fear that is driving markets these days. All show that fear has declined, and in some cases significantly. The VIX/10-yr ratio remains the highest, but mainly because the yield on 10-yr Treasuries has been driven to exceedingly low levels in part because of the Fed's recent vows to keep yields low for "some time" and to purchase Treasury bonds in order to drive down borrowing costs, neither of which has much to do with fear. (The other part of the reason for very low Treasury yields being the fear—or the expectation—of deflation.)
As fear subsides, liquidity is slowing picking up, and these are essential first steps towards recovery. All of this reinforces my belief that we are seeing a bottoming process in the equity and corporate bond markets.
Posted by Scott Grannis at 9:50 AM