The stable VIX, which measures the implied volatility of companies in the Standard & Poor's 500 Index, is no longer a good measure of volatility in the high-yield market and is lending high-yield investors a false sense of security, argues Brian Arsenault, high yield strategist at Morgan Stanley. "A relatively range-bound VIX has been an ingredient that has helped lull credit investors into a complacent state of mind," he wrote in a note to investors. One bearish high yield investor agrees: "Everyone's not as afraid of the future as they would be if the VIX were higher."
The VIX has become a less relevant risk barometer as the bid for structured equity products has kept implied volatility low, explained one credit strategist. "I've become disillusioned with the VIX; we've seen situations this spring where volatility has picked up dramatically and the VIX didn't budge a bit," he stated, suggesting spread volatility in the Dow Jones CDX as well as volatility in the small cap Russell 2000 benchmark are better proxies for high-yield volatility.
Arsenault suggested investors examine the number of stocks with a pick up in volatility and negative equity performance in conjunction with credit spread tightening as a gauge for future tumult in high yield. "Over the last several months we've observed a notable increase in the number of stocks showing significant declines during the first months of earnings season," he wrote, highlighting Petco, Terex, Domino's, Bowater, Pantry Inc. and Stoneridge as credits investors should be wary of.
