The world continues to adjust to the idea of a Trump presidency and there seems to be a lot of fear abounding.  For instance, I recently heard an economist state that he didn’t think even Donald Trump knows what action he’ll take as President.  We will all know the answers to what he’s going to do soon enough.  A question I recently got was, “If Trump is so scary why is VIX low?”  That’s a question I can answer.

There are two types of government related policy that can impact the economy.  Monetary policy is the one that we are all use to hearing about.  The big focus right now is what will the FOMC do and say next month.   The markets are pricing in just over a 90% chance of a hike at the December 13-14 meeting.  I'd say that's the market showing some certainty.

The other type of policy that can impact the economy is fiscal policy.  This is government oriented such as taxation, tariffs, regulations, etc.  Those are the things that a Trump administration will address more quickly than what the Fed does.  Fiscal policy may have a quicker impact on the fixed income markets than on the stock market.  Therefore the bond market is where the fear has been showing up since the election.   There’s no better indicator of bond market volatility than the CBOE/CBOE 10-Year Treasury Note Volatility Index (TYVIX).

vix-tyvix-election

The chart above shows the change in VIX and the change in TYVIX since November 8th.  VIX is down over 28% since the election while TYVIX has gained over 25%.  The gain in TYVIX was over 37% as of yesterday and the index took a breather today.  So VIX may be low as the prospects for stocks is positive for the near term.  However, the fear is in the bond market, and this probably relates to the uncertainty of the fiscal policies we will learn more about early next year.