vrijdag 16 juni 2017

Francesco Filia; Are New Lows For Bond Volatility The Calm Before The Storm?

It is not only Equity volatility being crushed these days. Treasury Volatility too reached all-time lows area this week, dipping below 4...
# Bond Volatility; In the last 5 years, whenever Treasury Volatility closed below rock-bottom 4 level, large movements in term rates followed swiftly (by approx 100bps each time, see Chart), quickly pushing volatility back up again in the process...


# Bond Volatility vs. 30yr US Treasury; Such dynamic takes place all the while as long-term government bond yields in the US reached a congestion area, depicted in the Chart below. From here, rates may move faster: either accelerating their descend (to pre-Trump levels) or rebounding sharply...


# 30yr US Treasury; The reasons why volatility across equity, bond, FX is at or below all-time lows is being debated by market participants. A blue-sky macro environment is hardly a convincing explanation. The fourth horsemen of (i) an unprecedented magnitude of Central Banks’ activism, (ii) a rising mania for passive investment vehicles (ETF and index funds, risk parity funds & vol levers, trend-chasing algos), (iii) the ensuing capitulation of active investors who default to chase passive ones and (iv) the power of make-believe economic narratives are more likely drivers. We attempt at explaining their sequence and interdependence here...


Whatever the reason, looking at rates, history may be a guide in suggesting a pattern of pick-up in volatility and sharp moves in long rates. Today’s moment may then be the calm before the storm....

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