Image Source: Pixabay
 

VIX (volatility index) has reached it’s lowest levels since March, trading at 45 day lows and trading around & below 18 this morning. Levels below 20 indicate a more stable environment in the markets. This is just below it’s 30 year average. Goldman Sachs says consumer sentiment continues to improve, raising it’s year end forecast for the S&P 500 to 6,500. Investors are seeking policy stability with most of the recent sell off being largely driven by erratic and ever changing policy uncertainty. These conditions have made it incredibly difficult for investors to navigate and plan around. As investors look ahead at least 18-24 months for the best returns, such forward returns look greatly optimistic. The here and now has been much less so.

Some uncertainty and turbulence remain in the Bond markets and a space where Institutional investors avidly watch for any signs of liquidity stress. The last major period this market saw liquidity stress was back early 2020 during the onset of the Covid – 19 pandemic. Most definitely nothing of such magnitude is being seen since the onset of the Global tariff fallout. Resumption of tightening spreads since early April suggest the worst conditions are in the rear mirror as we start to return to normal liquidity

IMO, the next area of risk to this market would be any possibility of a US debt downgrade. US debt has reached astounding levels, and the cost of financing this Government debt has grown precipitously due to ongoing higher rates. The US Gov is underway to find solutions to fund a large tax cut bill in the pending weeks. And the infamous US debt ceiling crisis will once again raise it’s ugly head. Funding this tax cut will bring America closer to reaching that ceiling during the summer months or sooner. Meaning Congress would need to swiftly pass legislation to raise the limit in order not to default on that debt. Whilst it’s incredibly unlikely the US would default on it’s debt, the very perception of a US downgrade could most definitely bring economic havoc. Yet again leading to higher debt payments and causing increased borrowing costs for both businesses and homeowners. Hitting the debt ceiling would bring turmoil to Government funding Social Security, Medicare and general operations. That in turn would cause rapid economic chaos along with a weakening Dollar and lower demand for US Treasuries. I would like to see this risk entirely averted to safely say that fully normalized conditions had returned to the Bond markets.

The S&P has this morning erased the losses of 2025 turning back into positive territory. This has reinforced the outlook that the underlying economy remains strong and resilient, and is headed in the right direction. So long as policy / geopolitical risks now stay in check.

(Click on image to enlarge)

More By This Author:

Gold Pauses At Crossroads As US-China Trade Truce Triggers Risk-On Shift, But Uncertainty Lingers
Port Slowdown And Hiring Freeze Signal Economic Strain Beyond Jobs Data
U.S.-Ukraine Rare Earth Pact Signals Strategic Shift