Market Volatility Bulletin: U3 Unemployment Hits 45-Year Low, Treasury Yields Trigger Higher Short-Term VIX Readings

by: The Balance of Trade

The September jobs figure was not that strong in the grand scheme of things, but the U3 unemployment rate signals higher fixed-income yields are in order.

Low vol was the secret to US outperformance over the last decade as compared with other markets.

If both the dollar and rates charge higher in tandem, then watch out.

Market Intro

Bureau of Labor Statistics

The September NFP report came in at 134,000 jobs, but there is a chance that Hurricane Florence had an impact both on the data gathering process, as well as the jobs figures themselves.

CNBC: Friday 9:57 AM

The real story over the last couple days has not so much been stocks (SPY, DIA, QQQ, IWM) but the steep rise in the 10YR US Treasury. At the beginning of 2018, a steep swing higher in Treasury rates arguably provided the backdrop for equity market travails at the global level (ACWX, EFA, EEM).


Note: Stocks have dumped a good bit since when these graphics were assembled. That's important to the current state of the environment.

According to SectorSPDR, the commodities sectors (XLE, XLB) are the only two groups that are suffering losses this morning as this piece is written. The five-day record is more mixed: the communications (XLC) and consumer discretionary (XLY) are down as the FANGs cool down.

This September's jobs figure tallies in as the lowest of the last twelve months. The US unemployment rate clocked in at a forty-five year low, but the actual jobs gains are very much in range with what we've seen going back to September 2015.

Thoughts on Volatility

Treasury implied volatility hiked precipitously over the last couple days. The TYVIX hit all-time lows just over the past couple weeks. I suspect that if this index dampens over the next week, then equity volatility (VXX) will not find a lasting foothold.

Notice how the S&P 500 index exhibits not only the highest returns, but also the lowest volatility of the group. I contend that the sustained low volatility was the single greatest generator of the returns, as opposed to earnings or economic data.

Always look on the bright side of life. Are rising interest rates going to "melt" the stock market? I believe that there is actually a decent chance it will… recall that TINA (there is no alternative) acted as the battle cry for higher valuations for almost half a decade.

I have asserted that the "healthy range" for the 10-Yr yield is 2.25-3.75. We're gradually sniffing out the upper end of that range. I definitely believe that the economy is less vulnerable than risk assets are should the move higher continue.

Term Structure

The real news over the past forty-eight hours or so was the VIX9D. At one point on Thursday the index was up 85% from where is had stood the day prior.

The volatility situation now is more fluid than it had been, and so I expect the spot indexes to whip around more. If the VIX9D really jerks around, I think the VX term structure could also loosen. Otherwise I expect the futures to mostly hold their ground, as they have for most of the last three months.

Should this happen, then rebalance decay on leveraged products (SVXY, UVXY, TVIX) could be particularly at risk.

The CBOE Skew index is dipping to some of the lowest levels of the last three months. This indicates that the options market is not currently anticipating outsized likelihood of strong drawdowns relative to a pronounced rise in the SPX; I mention this within the context of index readings of the past three months, which happen to feature the highest-ever SKEW readings.

Markets are rightfully focused at the present on volatility in rates (IEF, TLT, AGG). In theory there should be a connection between movement in bond yields vs. currency strength, whereby higher real yields correspond to a stronger currency. So far the dollar (UUP) has not responded. If the greenback took the signal from rates, then we could truly see a sustained boost in volatility.


If this is your first time reading Market Volatility Bulletin, thanks for giving it a try. If you're a regular, we thank you for your ongoing contributions in the comments section.

I invite you to read up on the dialogue from Wednesday's discussion. Thank you to Hiro for asking a great question, and for the excellent responses from Alan and Silent Trader in terms of explaining the tradeoffs inherent to the rebalance decision.

Thank you for reading.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I actively trade the futures and options markets, potentially taking multiple positions on any given day, both long and short. I also hold a more traditional portfolio of stocks and bonds that I do not "trade". I do believe the S&P 500 is priced for poor forward-looking returns over a long timeframe, and so my trading activity centers around a negative delta for hedging purposes.