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Volatility Sizzles As Markets Waver

Despite sparse developments in global fundamentals, and relatively good vibes from U.S. economic indicators, fear overtook financial markets this week and energized VIX indicators. The CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (ticker symbol: TYVIX), the gauge for interest rate volatility, reached a value of 8.53 near the open on Thursday and closed at 7.65 -- the TYVIX Index had not closed this high since January 2015.

In addition, the intraday high in the CBOE Volatility Index (VIX® Index) on Thursday was 30.94 and the close was 28.14. And the CBOE/CME FX Yen Volatility Index (JYVIX) got close to 15, and the CBOE/ CME FX Euro Volatility Index (EUVIX) reached above 12. When the Bank of Japan decided on a negative short rate two weeks ago several longer-dated sovereign yields followed suit. Investors switched to safer assets and pressed the 10-year U.S. Treasury yield below 2 percent. The recent rise of TYVIX Index has been tied to the steep decline of that yield. Janet Yellen’s dovish testimony before Congress on Thursday may have quelled the fire, because the markets rebounded slightly by Friday morning.

Figure 1. TYVIX Index closing levels versus 10-year U.S. Treasury yields


Figure 2. Statistical update


Forward Outlook

Backwardation is the typical outlook for VIX futures. Option traders expect the recent highs in VIX, TYVIX and JYVIX indexes to subside. However, the foreign exchange and Treasury markets are still in flux amid the aftereffects of China’s economic slowdown, the impact of an oil surplus on global trade and the turn to negative rates in Europe and Japan. As a result, the TYVIX Index is expected to rebound past February and the higher volatilities expressed by the EUVIX and BPVIX indexes also are expected to persist.

Figure 3. Term structures of VIX-like volatility indexes