It is not only Equity volatility being crushed these days.
Treasury Volatility too reached all-time lows area this week, dipping below 4.
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.