KEY TAKEAWAYS
- A hike and an oil spike, but equities held. The Fed’s first hike in over three years and surging Brent, while the Nasdaq gained 1.93% and the S&P 500 finished roughly flat.
- Yields are at extremes. US 2-year and 10-year yields hit 4.88% and 5.28%, and gold and silver fell 8.54% and 6.55%. We expect yields to reverse in the short term, which would help AI-exposed names.
- Bond volatility is the one to watch. Cross-asset volatility is still low, but bond volatility picked up meaningfully. It feeds into currencies through funding rates, into credits through spread, and into the VIX once low stock correlations fade into Q3 earnings.
Market Overview
Historically a volatile period for global markets, September lived up to its reputation this year, dominated by macro catalysts including surging Brent crude prices and the Federal Reserve’s first interest rate hike in over three years. Despite these headwinds, US equities demonstrated remarkable resilience—the Nasdaq Composite gained 1.93%, while the S&P 500 ended the month largely flat. Conversely, fixed income markets experienced a sharp sell-off following the FOMC decision; US 2-year and 10-year Treasury yields surged to pre-Global Financial Crisis (GFC) highs of 4.88% and 5.28%, respectively. This sudden shift in rate expectations exerted significant pressure on yield-sensitive assets, driving gold and silver down by 8.54% and 6.55%.[1]
The Volatility
Volatility in markets has managed to trend downwards over the last year or two despite a litany of exogenous risks and tape shocks. Chart 1 shows how various asset class implied volatilities are trading relative to their own history, using a 10-year lookback. The volatilities are ranked by z-scores, which compares the current volatility level for an asset versus its own 10-year history. A z-score of +2, for example, would mean that the current volatility level is trading 2 standard deviations above its long-term average (i.e. rich) while a z-score of -2 would mean it’s trading 2 standard deviations below average(i.e. cheap). Because each asset class volatility trades at different levels and often defined differently (e.g. lognormal vs. normal vol, price vs. bps vol), by standardizing using z-scores, we are able to compare different asset class volatilities on the same scale and see at a glance if there are any divergences or dislocations in the cross-asset volatility markets.
As seen in the chart, cross-asset volatility is relatively low, but bond volatility has picked up meaningfully in September as yields continue their ascent. Bond volatility is a vector of risk to all other asset classes. Currencies become more volatile as funding rates become less certain, credit is affected as it trades as a spread over government borrowing costs, while the VIX is at the mercy of low index correlation in stocks, which won’t last as bond vol rises especially when we are closer to Q3 earnings.
More importantly, this comes under the backdrop of weakening and negative excess liquidity, as inflation has been taking away money growth. Asset prices are more prone to a higher volatility regime. We find good risk-reward in structures such as long vol certificates (i.e. directly long realized volatility), call warrant on vol (long implied volatility asymmetrically), and principal protected note with long call.
Chart 1: Cross-Asset Volatility Snapshot (10Y lookback)[2]
Positioning
In the current environment where rates are elevated and volatility is tepid, we recommend principal protected notes or minimum redemption notes. This includes range accruals on low vol FX pairs such as USD/HKD, and collar notes on precious metal. In addition, US yields are at extremes, we expect to see reversal on yields in the short term. This will be beneficial for risky assets such as AI – exposed names.
[1] Performance is sourced from Bloomberg, dated as of September 30, 2026.
[2] Source: CBOE
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