Key Highlights

• Investors may need to reduce their exposure to equities, tweak sector allocation or alter size/style emphasis.
• The urgency arises from the prospect of greater rates volatility after a multiyear trend of falling rates volatility.
• Since 2023, equities have been strongly correlated to rates volatility, as measured by the MOVE Index.
• Longer-duration assets like tech and particularly semiconductors will react more negatively to rising rates volatility than the broader market. 

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Rates volatility could be set to rise

EXHIBIT #1: MOVE INDEX MOVING AVERAGES HAVE EXPERIENCED A MULTIYEAR DECLINE

_{Source: BNY Markets, Bloomberg}

Rates volatility is poised to increase after a multiyear decline, which could be driven by the following:

• Resurgent inflation
• Markets struggling to calibrate to  a new Warsh-led Fed
• Emerging growth wobbles

Exhibit 1 suggests that the decline in rates volatility stretching back to 2023 might have reached its trough.

Equities are highly exposed to rates volatility

EXHIBIT #2: MOVE INDEX VS. EQUITY INDEX – DAILY CORRELATIONS, JANUARY 1, 2023, TO JUNE 30, 2026

_{Source: Bloomberg}

Since 2023, and more recently since 2025, rates volatility has also been much more consequential for equity markets than in the past. As Exhibit 2 shows, the S&P 500 has been strongly negatively correlated with rates volatility at about -84 %, as measured by the MOVE Index. This pronounced correlation persists across tech-centered equity market segments. The Nasdaq (-83%), tech (-82%), and semiconductors (-73%) are reacting far more to bond market volatility than many investors are positioned for.

Semiconductors and growth sectors bear greater risk

EXHIBIT #3: CHANGE TO EQUITIES ASSOCIATED WITH A 1BP CHANGE IN THE MOVE INDEX

_{Source: BNY Markets, Bloomberg}

Growthier equity segments are longer-duration assets and – when rates volatility rises – are responding much like long-duration bonds. Exhibit 3 shows the beta of these equity indices to the MOVE Index, indicating that the biggest pressure is landing on the longest-duration parts of the equity market.

That matters most for semiconductors. While they have nearly the same correlation to the MOVE Index as the S&P 500 does, semiconductors are twice as sensitive to rates volatility as the market, indicating embedded growth expectations, more duration risk, and more downside if bond volatility keeps rising.

This same pattern runs across sectors. As Exhibit 4 shows, longer-duration sectors like Consumer Discretionary, Information Technology, and Communication Services are materially more sensitive to rates vol than defensive sectors and energy are. If rates volatility rises from here, leadership could change quickly, and portfolios concentrated in growth could see sharper swings than investors have grown used to.

EXHIBIT #4: PERCENT CHANGE IN S&P 500 SECTORS ASSOCIATED WITH A ONE-POINT CHANGE IN THE MOVE INDEX

_{Source: BNY Markets, Bloomberg} 

Investors should rotate toward more defensive exposure

Investors should act now. That means expanding risk budgets, reducing equity exposure, or actively reducing the equity duration of their portfolios by changing their sector allocation or size/style emphasis.

In particular, investors should favor defensive sectors on the right of Exhibit 4, with large cash reserves on their balance sheets and consistent all-market revenue.

How to track our theses:

• Rates volatility: Track the 100- or 200-day moving average of the Move Index (Exhibit 1). If it rises, expect rates volatility to matter more for equities.
• MOVE–equity correlation: Track the MOVE Index’s correlation to specific equity baskets, particularly longer-duration ones. If the correlation remains strong, focus more on the sensitivity of these baskets to rates volatility. 

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