As market participants returned to the view this week that a September (rather than December) fed fund hike may be more likely, backed up in part by an as-expected U.S. July employment report on Friday, expected Treasury volatility measures through December 2015 decreased, but just barely. At week’s end, the TYVIX Index was still about 1 index point below its value at the beginning of July, as were futures on TYVIX. This suggests the 10-Year Treasury market is indifferent to whether the Federal Reserve hikes the federal fund rate in September 2015 or in December 2015. That’s a real contrast with May 2013, when a Federal Reserve “taper” scare doubled the value of the TYVIX Index from around 4 to 8.
Figure 1: Term structure of expected Treasury volatility: TYVIX and futures on TYVIX (Ticker VXTY) since July 1, 2015.
Diverging Reaction in Equity and Bond Markets
Very interestingly, the equity market is having the opposite reaction to a shift in current sentiment. VIX, the benchmark for equity volatility, is up for the week.
Equity Market More Nervous than Treasury Market? Term Structure of TYVIX Is Flatter, but Term Structure of VIX Is Not
Another interesting development is that the term structure of TYVIX futures has flattened. In other words, one-month volatility is not expected to change much from today until the end of 2015, and there is little risk premium of December over August volatility. Ceteris paribus (all other things being equal), volatility futures are in contango, with December volatility more expensive than August volatility. Now look at the term structure of VIX futures: It has shifted down since July 1, but has not flattened.
Figure 3: Snapshots of term structures of TYVIX and VIX Indexes in early July and August 2015
Post written by Catherine Shalen, CBOE Research