(Bloomberg) -- The global pandemic is still raging, U.S. policy makers are about to cut stimulus, energy prices are surging and bonds are being sold off. And yet, Wall Street’s fear gauge is near an 18-month low.

The Cboe volatility index or VIX, which measures expected fluctuations in the S&P 500 Index, has been on a downtrend for the past month and dropped to 15.7 on Tuesday, near the lowest since February last year. The gauge is now well below its lifetime average of about 19.5, according to data compiled by Bloomberg stating in 1990.

The divergence between what is happening in the stock and bond markets can be seen in the ratio of the VIX and the MOVE Index, which tracks implied volatility in Treasury options. That proportion surged this week to the highest level since February 2020.

There are four potential reasons why the VIX may be so subdued, according to Chris Murphy, a derivatives strategist at Susquehanna International Group.

  • U.S. earnings have been positive so far, and earnings season tends to reduce correlations and overall volatility
  • Investors may be getting more comfortable with the “inevitable” Federal Reserve tapering of asset purchases, and are focusing on historical tendencies for equities to perform well in the early stages of a rate-hike cycle
  • There may be expectations for investors to boost stock allocations due to a lack of appealing alternatives and high levels of cash
  • The S&P 500 was below its 50-day moving average for most of the past two weeks, the longest stretch since it emerged from its Covid lows

“Lower implied volatility levels and positive price momentum might open the door for commodity trading advisors and volatility targeting funds to buy more stocks,” Murphy wrote in a research note Tuesday.

The VIX had jumped from the outbreak of the coronavirus pandemic in late February 2020 and averaged about 30 for the following 12 months, reflecting the uncertainty brought on by the pandemic. The development of vaccines and signs of economic reopening saw it drift lower, and the average has been around 19 since March. The Cboe VVIX Index, which measures swings in the volatility gauge itself, closed Tuesday at its lowest since April.

 

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