By Saqib Iqbal Ahmed
NEW YORK (Reuters) - A still-jittery bond market is clouding the outlook for a rally in U.S. stocks, analysts tracking measures of market volatility said.
Stocks and bonds have been in a tight relationship over the last few months, with the S&P 500 index surging nearly 7% in the last 10 sessions while the benchmark 10-year Treasury yield has tumbled 37 basis points from a 16-year high.
At the same time, the Cboe Volatility Index,, which measures expectations for stock gyrations, has fallen to a seven-week low of 14.13.
While such a retreat in Wall Street's "fear gauge" would normally be a green light for stocks, there's a catch: it has not been reflected in the most closely watched measure of Treasury volatility expectations, the MOVE index, which remains near its recent high.
That could be a problem if Treasury yields - which move inversely to bond prices - resume a climb that has pressured stocks since the summer.
"Equity markets have been the tail that's being wagged by the rate market dog," said Alex Kosoglyadov, managing director of equity derivatives at Nomura.
The MOVE index is nearly eight times higher than its equity-focused counterpart. That compares to a three-decade average in which the MOVE has been just under five times the value of the VIX.
"Rates are ultimately the foundation of the house, and if the foundation is moving around dynamically, I don't know how you can make the case that the VIX is going to 12," Tallbacken Capital Advisors CEO Michael Purves said. A significant drop in Treasury market volatility would be great news for stock market bulls, Purves said. "That would be huge," he said.