How to gauge investors’ fear of inflation

WHAT DO INVESTORSVIXVIXMOVE fear most? In the Bank of America’s long-running survey of fund managers, the tail risk that has mostly preoccupied them until recently has been the pandemic. In this month’s survey, though, inflation rose to the top of the list of worries. It is not hard to see why. High inflation, if sustained, would require central banks to act decisively to contain it. That would mean the end of the low interest rates that have underpinned the prices of an array of expensive-looking assets, from stocks and bonds to property.Surveys are one thing. The bets investors make are another. The , or volatility index, is the best-known market gauge of fear. It tracks the cost of insuring against extreme moves in American share prices and is widely used by banks and asset managers as a guide to managing risk in general. Yet the does not get directly to what presently worries investors. For that, you need to consult a less-celebrated oracle—the , or Merrill Lynch Options Volatility Estimate, a market-based measure of uncertainty about interest rates. It has the stronger claim to being the true fear index. If it spikes it means bond investors have been gripped by raw terror.