Are New Lows For Bond Volatility The Calm Before The Storm?

Submitted by Francesco Filia via Fasanara Capital,

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.

We will analyze bond volatility and its catalysts in more details in future write-ups.

Comments

The Count Fri, 06/16/2017 - 17:18 Permalink

Whoever is waiting for the enevitalbe burning of Rome, you better have you bets in place now. Once all hell breaks lose you won't be able to call your broker, the servers will be overloaded, trading will be halted, orders will be worthless. It will be a wicked wild ride, kind of like when I floor my SRT Hellcat and the raging mad Tasmanian devil inside is unleashed. PS: This car has 707 HP.

Charvo Fri, 06/16/2017 - 23:16 Permalink

I looked at my bond and stock charts.  It seems the current situation where bonds are rally with stocks is very similar to 2014.  I think bonds will win out with stocks topping earlier than bonds.