Volatility in general is still falling, with both equity and commodity volatility lower than their 2005/06 trough.  However, we are seeing signs of life in interest rate volatility.  US rate volatility has recently pipped up, and this has been led by a sharp increase of Japanese rate volatility as a result of the easing policies of the BoJ.  A rise in bond yields in Japan accompanied by a rise in bond volatility could be very damaging, especially as Japan has to refinance about 50% of GDP’s worth of debt each year.

Japanese rate volatility has already moved, but we expect other volatilities follow.  The credit cycle leads volatility by about 3 years and based on this we expect to US equity volatility to go higher soon.  As the top chart demonstrates, interest rate and commodity volatility should follow suit.