The markets are pondering the effect the first target rate change in seven years will have on volatility (Fed rates have hovered between zero and one-quarter percent since December 2008). The Federal Open Market Committee meets on December 15-16 and is widely expected to announce a rate increase at the conclusion of the two-day meeting. Thus far, the imminent prospect of tighter monetary policy has made few waves. In the equity market, the CBOE Volatility Index (VIX Index) is up for the week, but has exactly the same value (22.55) as it had on October 1, when a rate hike by December 2015 was viewed as improbable. The CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (TYVIX Index) is at almost at the same value as in October. However, volatilities indexes of foreign exchange markets are lower.
Figure 1 and 2. Volatility indexes, 10-year Treasury yields ahead of the December FOMC meeting
Moreover, forward prices indicate that the market does not anticipate an increase in volatility in stocks through January 2016, and suggest volatility may even go lower. VIX is now in backwardation for the near term. The term structure of EUVIX has switched from backwardation to flat as EUVIX has dipped over the last week.
Figure 3. Term structure of VIX-like futures on December 11, 2015
Figure 4. Weekly Statistical update