Treasurys, Interest Rates and the MOVE Index

We keep hearing that long term Treasury Bonds are going to tank and that we need to get short before they fall off a cliff. While this may very well happen, we doubt that it occurs anytime soon. We are not alone in this view as Bill Gross and the gang at PIMCO seem to agree. While some argue with his view of a new slow growth period the market does not seem to have an issue with it. Not only has Helicopter Ben said that the Fed is not raising rates anytime soon, but market indicators are saying the same thing.

One Treasury indicator that we use is the MOVE index which is a “yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of volatilities on the CT2, CT5, CT10, and CT30.” As you can see in the chart below (click to enlarge) it has been falling since July as the market has come to the realization that we are in for a slow growth period and that the Fed is not going to raise rates any time soon.

MOVE Index

Author's Disclaimer: The Macro Trader is currently long AGG

Comments

[guif]

Only problem is that while 10Y yields are still falling, CDS are starting to rise ... not a nice convergence !!!

2009 Nov 18 09:54 AM

[geohjr]

Interesting; so basically it's the conventional wisdom that the conventional wisdom is wrong. I've never seen market thinking so split.

2009 Nov 18 10:48 AM

[richard_e_newton]

Its strange but true that what is implied by volatility is largely determined by what happens today. When there is a huge plunge in the market it is rarely predicted in the preceding day's implied volatility, so we currently see money pour into treasurys driving prices up and volatility down. That move index could easily be ambushed by an unexpected event such as a bad inflation number or a failing treasury auction. What I'm trying to say here is that I don't put too much faith in the MOVE index as an indicator of the future prices of treasurys even though it may provide evidence that should indeed be examined. Its telling us that this is what we think will happen provided nothing changes. Problem is, change is inevitable

2009 Nov 18 04:15 PM