Analysis-Wobbling US stocks could push volatility-linked funds to ramp up selling

NEW YORK - Volatility-linked investment strategies are joining the nascent sell-off in U.S. stocks and could help accelerate declines if market gyrations keep increasing.

Nomura's Charlie McElligott estimates that volatility control funds have already started selling, shedding about $16.2 billion in equity exposure over the last week. "The volatility increase we're seeing is across asset classes," said Mandy Xu, head of derivatives market intelligence at Cboe Global Markets. "I think it is the market waking up to potential downside risk."

A more pronounced jump in volatility could also activate slower-reacting funds that use volatility as a trading signal, including commodity trading advisers and risk parity funds, piling more pressure on the market as they ramped up selling. Jerry Dean McLain first bet on former president Donald Trump’s Truth Social two years ago, buying into the Trump company’s planned merger partner, Digital World Acquisition, at $90 a share. Over time, as the price changed, he kept buying, amassing hundreds of shares for $25,000 - pretty much his “whole nest egg,” he said.

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Bond Market Volatility and its Impact on StocksAs U.S. interest rates rise and bond yields reach new highs, stocks may be affected by bond market volatility. A calm bond market is crucial for all markets as borrowing costs are tied to Treasury yields. Higher volatility leads to higher risk premiums and discount rates on financial assets. The current level of bond market volatility is relatively low but has increased recently.
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