SPX® Realized Skew Most Inverted in Over 20 Years

Weekly Commentary: March 4, 2024

Cross-Asset Volatility: Implied volatilities were mixed across asset classes last week as PCE inflation gained in line with expectations. Equities rallied to new highs, while the VIX® index fell 0.6 pt wk/wk to 13.1% (24th percentile low). US rates vol declined marginally while the implied odds of a June rate cut increased to 66% (vs. 57% a week ago). The decline in real rates (US 10-year real yield fell 7bps on Friday) led to a surge in gold prices, with GLD ending the week at a record high. GLD implied vols saw a meaningful bid on the rally, with 1M implied vol up almost 2 vol pts on Friday to 11.4% (39th percentile) and screening as the richest cross-asset vol currently.

Equity Volatility: While implied volatilities are low across almost all global equity indices currently (RTY being the notable exception), the difference is they’re realizing in the US vs. elsewhere (see Exhibit 1). For example, both SPX and SX5E 1M implied vol are currently trading ~11% but the SPX is realizing ~12% vs. SX5E at 9%. The SPX 1M implied-realized spread, at -1.1%, is currently screening in the 12th percentile low while the SX5E 1M implied-realized spread, at 2.1%, is in the 61st percentile high. The most expensive to carry has been MXEFSM (MSCI Emerging Market Index), with a 1M implied-realized volatility spread of 4.9% (80th percentile high)

Exhibit 1: Implied vs. Realized Volatility (1M)

^{Source: Cboe}

Skew: We highlighted last week the extreme flatness in SPX skew, with 3M 25-delta skew (spread) hitting a 10-year low of 2.8%. As low as implied skew has gotten, realized skew is even more extreme, with SPX realizing higher volatility on up days than down days. As Exhibit 2 shows, realized skew has been inverted in SPX since 2022 – partly explaining why implied skew has been so low the past two years. Markets have been taking the escalator down and the elevator up – so to speak – reversing the traditional behavior. This has gotten even more extreme so far in 2024, with a realized skew spread of -2.9% (i.e. SPX trading ~3 pts more volatile on up days than down days this year) – the most extreme in over 20 years (see Exhibit 3). 

Exhibit 2: SPX Realized Vol on Up vs. Down Days

^{Source: Cboe}

Exhibit 3: SPX Realized Skew Most Inverted Since 2002

^{Source: Cboe}

Term Structure: SPX term structure steepened last week, with the 1Y-1M vol spread widening from 4.0% to 4.5% (58th percentile high), led by a decline in the front-end of the curve.

Correlation & Dispersion: Implied correlations have continued to decline steadily this year, with SPX 6M implied correlation, as measured by the COR6M Index, falling to a new record low of 18.7% last week. Despite macro-overhangs, investors remain focused on idiosyncratic, sector, and thematic risks – all contributing to the lack of bid for index vol (and hence low correl).

Cross-Asset Volatility Monitor

^{Source: Cboe}

Cross-Asset Volatility Snapshot (10Y Lookback)

^{Source: Cboe}

Cross-Asset Correlation Matrix (1M)

^{Source: Cboe}

Cross-Asset Correlation Analysis

^{Source: Cboe}

Macro Equity Volatility

^{Source: Cboe}

VIX Index Volatility

^{Source: Cboe}

US Index Volatility

^{Source: Cboe}

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