Cboe Blogs

  Market participants have observed that the expected December increase in the federal fund target rate is flattening the term structure of Treasury yields as investors shift from the short to the long end of the curve.  However, fewer market observers have noted that the same scenario is playing out on the volatility side.  As TYVIX continues to decrease, the expected volatility of shorter-dated Treasuries, such as one-year Treasuries, is rising, pushing the spread between the two[...]

U.S. and European equities are the only market sectors to express some fear of a rate hike since the November 4, 2015, congressional testimony by Fed Chairwoman Janet Yellen, who indicated that a December increase in the federal funds’ target rate was a real possibility. From November 4 through the close on November 12, the VIX Index increased by18% and VSTOXX by 20%, in spite of the European Central Bank’s (ECB’s) commitment to extend its quantitative easing program. On the other[...]

Encouraged by the downward trend in the U.S. unemployment rate and unfazed by a third contraction in the ISM Manufacturing Index, Federal Reserve Chair Janet Yellen told the House Financial Services Panel on Wednesday that a rate hike is still “a live possibility” for the December meeting of the Federal Open Market Committee (FOMC). As she testified before Congress at mid-week, TYVIX resumed the upward path it had followed since October 22. Interestingly, positive reports on jobless[...]

The Federal Open Market Committee’s statement released after its October 28 meeting seemed the usual “on the one hand … and on the other hand.” The first hand held job growth and the second hand held inflation, or rather the lack thereof. Yet investors in the Treasury market saw a hint that a federal fund rate hike could still occur at the FOMC’s December meeting. The 10-Year Treasury yield rose to 2.19, its highest value since September 21. This was sufficient to nudge[...]

It is ironic that as TYVIX was venturing in its bottom quintile – below 5 – U.S. regulators announced they are considering steps to control Treasury market volatility (announced Tuesday at a Federal Reserve Bank of New York conference). TYVIX is CBOE’s benchmark for Treasury volatility, and the reason it is decreasing is that strong demand from U.S. investors is supporting the price of Treasury notes despite China’s sell-off. On the equity side, a slight increase of the CBOE[...]

As reported earlier this week in the Financial Times, the standard deviation for economic forecasts for the U.S., EK, EU and Japan all are near their lows, with survey firm Consensus Economics reporting very little dispersion of GDP year-ahead forecasts. More generally, there is a consensus that worldwide economic growth looks bleak, and that a Federal Fund target rate hike is improbable in the near future. Accordingly, investors are taking a pause. In particular, the volumes of trading in CBOE[...]

Volatility feeds off fresh news, especially the bad headlines, and it appears news of the economic slowdown in China and of its impact on emerging markets has been fully digested. It is also clear that central banks will continue to pursue stimulative policies until further notice. In the absence of further shocks, the VIX, TYVIX, EUVIX, BPVIX and JYVIX indexes turned cooler this week.  As the VIX Index decreased, its term structure came closer to contango. Figure 1.  Weekly Update --[...]

  Treasury Volatility Is On Sale   Market participants perceive a lack of liquidity in the Treasury market and are concerned that more frequent volatility flashes will ensue. Yet Treasury traders appear complacent about short-term Treasury volatility, and are not pricing it high. The price of Treasury volatility is reflected in the spread between expected Treasury volatility (the CBOE TYVIX Index) and realized Treasury volatility. The average value of the spread represents the premium[...]

  Expected volatility exploded last month, on August 24, after the Shanghai 300 Index dropped by 8.75 percent, its steepest year-to-date move.  On Tuesday of this week, the change in the Shanghai Index from Monday’s close was a benign .93 percent, but news of a contraction in China’s manufacturing sector, as measured by the Caixin/Markit China General Manufacturing Purchasing Managers’ Index™ (PMI), was worrisome enough to turn around the majority of VIX indexes.[...]

The financial world is familiar with volatility smiles and volatility smirks. This week we were treated to a volatility yawn. Treasury and equity volatility declined all the way into the Federal Open Market Committee’s Wednesday-Thursday meeting as investors concluded that the FOMC would probably not raise the federal funds target rate – the FOMC had repeatedly voiced its concern about too little global growth and too little inflation.  But all was not ho-hum on Thursday. A moment[...]

Between China’s softened economic landing and a possible Federal Reserve rate hike next week when Fed policymakers meet, volatility has been lifted by the Sturm and Drang of almost daily economic announcements from Asia, Europe and the U.S. Volatility is now reverting to more normal levels. But what is normal? As seen in Figure 1, the new normal for the CBOE VIX Index is now closer to 25, which is 40 percent higher than at the beginning of 2015. EUVIX is up 19 percent, and TYVIX up 4 percent.[...]

A New Volatility Regime of Generally Higher Values than a Year Ago With the Chinese stock market on holiday (the Shanghai and Hong Kong markets were closed Thursday and Friday in remembrance of the 70th anniversary of World War II), volatility has stabilized.  However, amid persisting uncertainty about the world economy, it is a new regime. Values are significantly higher than a year ago, especially for equities. Figure 1. Weekly Update on Volatility Levels VIX Futures in Backwardation Stock[...]

General Volatility Flash        U.S. investors’ expectations of how China’s slower economic growth pace would impact the U.S. economy experienced a violent turnaround, setting the scene for Monday’s stock market tsunami. U.S. stocks spent the week recovering, and Figure 1 shows how the unfolding of this mini crisis impacted volatilities across different asset markets. Although the stock market plunged on Monday, it is clear from Figure 1 that[...]

  Federal Funds Target Rate and Treasury Volatility With 26 days left until the September 16th meeting of the Federal Reserve Open Market Committee, and signals for U.S. rates diverging amid continued China and Europe economic weakness, it is still uncertain whether the FOMC will lift the lid on the federal funds target rate (FFTR) on September 16 or later. The FOMC is concerned that a rate hike will stall the U.S. economy and market participants are concerned that a rate hike will depress Treasuries[...]