Remember: The US government isn’t a corporation.

Stan Druckenmiller may not understand (or appreciate) that, and neither, apparently, do a lot of other market participants who insisted last year that Janet Yellen should’ve “taken advantage” of low rates by deftly shifting Treasury’s term structure (tactically extending America’s WAM).

That sounds intuitive (and Druckenmiller grabbed all kinds of media attention when he derided Yellen for not “locking in” low, long-term borrowing costs), but as detailed extensively here in November, it’s actually absurd, and on multiple levels.

Still, there’s probably something to the idea that the juxtaposition between the sharp increase in government borrowing costs and rock-bottom debt servicing costs for corporates (as a result of heavy issuance in 2020 and 2021) is behind the divergence between bond (“government”) vol and equity (“corporate”) vol observed at various intervals.

I’ve been down this analytical road before, and I should emphasize: This is a 30,000-foot view — a discussion which, if you were having it in person, you might introduce by saying, “At a conceptual level…” It’s not a deep-dive into the literal, ear-to-the-Street flows which explain the volscape.

The figure below, from SocGen, illustrates the main point. “Most of the higher interest cost so far has been felt by the government” which, when it issues at the front-end, is “paying the highest rates on the curve given yield curve inversion,” the bank’s Jitesh Kumar and Vincent Cassot wrote.

They went on to say that a dozen years of monetary accommodation and generally easy policy likely explains large corporates’ “insensitivity” to recent rate hikes.

Many investors, Kumar and Cassot said, were “puzzled” by the disparity between elevated bond vol and subdued volatility in equities. There are, of course, any number of factors which explicate equity vol at any given time, and the myriad drivers of elevated rates vol were hardly a secret in 2022 and 2023.

But, again from a 30,000-foot perspective, you might suggest, as SocGen did, that “low stress on the overall corporate sector explains the divergence between bond and equity market volatilities.”

If nothing else, the figure above is interesting — thought-provoking at a conceptual level.

Their 2024 vol outlook isn’t the first time Kumar and Cassot mentioned this, by the way. I covered their last exposition a few months back.

“We have previously highlighted that the ratio of MOVE to VIX tends to correlate well with the ratio of the interest cost burden of the government sector to that of the corporate sector,” they wrote, in their latest. “The collapse in the net interest cost of corporates is therefore consistent with very low levels of equity volatility compared to rates volatility.”

I’d be remiss not to remind readers that one reason (the main reason, even) that market participants and ratings agencies are so concerned about America’s fiscal trajectory is the notion that between the complete rejection of bipartisanship and the perception that the House is ungovernable, the US now lacks the institutional capacity to address problems, real or perceived.

To be sure, “debt” is a misnomer in the context of the world’s reserve currency issuer. And the privileges that go along with issuing the reserve currency afford the US virtually unlimited latitude to push any and every envelope, including the one marked “fiscal.” But there’s a sense in which that begs the question. Institutional credibility underpins the dollar’s reserve currency status. If that credibility disappears, “problems” (with scare quotes) become problems (no scare quotes).