Market Volatility Bulletin: Too Quiet?

by: The Balance of Trade

US equities are rebounding on Friday, but really haven't changed much since the beginning of the week.

As debt balances grow, it is quite likely that SPX vol will correlate more with Treasury volatility measures.

VVIX is at 80. low relative to its own history, but still pretty dang high compared to related indicators such as VIX.

Market Intro


Spot VIX is aiming at a 13-handle as we wrap up a fairly sleepy week of trade for US equities (SPY, DIA, QQQ, IWM). All the indexes are trading near their five-month highs.


The ISM Manufacturing Index came in at the low end of estimates. Investors are handling the increased frequency of soft data rather well.

Thoughts on Volatility

People often complain about the CPI, at least with core CPI. Consumers buy very different baskets of goods in practice. For instance, I hope/suspect that our family will spend relatively little on health care and considerably more on education over the next decade, as my wife and I have pre-teen kids. As another example, people who live in the West tend to drive more than those on the East Coast.

Regardless of how the CPI is constructed, the Fed for the time being seems less concerned about their preferred measure overheating than they are about a slowing economy. There are even talks of rate cuts beginning to circulate.

So long as CPI remains tame, there is probably decent room for the Fed to maneuver and take to the back foot on its monetary ministrations.

The 10-Yr US Treasury VIX is indeed near all-time lows! In 2016, USDJPY vol ramped up in a meaningful way, and arguably exacerbated the large risk-off move in January/February of that year.

Since 2017, we have experienced quite a bit of co-movement between Treasury vol and SPX vol. As the US economy slowly becomes increasingly leveraged, this relationship may well grow in importance.

It is absolutely "remarkable" that we are in the midst of an economic expansion and that we are posting $1T+ debt increases by the federal government! What will deficits be in a year where we hit a recession?

If and when treasury yields really do move sustainably higher, Americans are going to have a giant debt servicing cost to contend with. Really this is true of most developed nations.

Term Structure

At some unknown point in the future vol may burst higher as investors panic over debt servicing levels, but for now things are just smooth sailing.

The VX term structure is quite flat here, but I say there's room for steepening if we don't get a pick-up in realized vol measures soon. At present, even the 30HV is making its way below a 10-handle. Spot VIX at 14.2 is actually trading at a very healthy premium over 20HV, and so there is room here for implied vol to drop. That would naturally be good news for vol shorts (SVXY, ZIV), who would at the very least pick up higher levels of roll yield.

VVIX of course is hanging with the host of measures that are content to drift near the low end of historical vol ranges. VX options continue to indicate relatively narrow scope for a giant blow-out move on the underlying futures.

Still, VVIX at 80 is still 80 vol points! That's around the all-time high that SPX set during the financial crisis. So while it is true that the predicted move for the VX is low in relative terms, we don't want to get lulled into the sense that nothing is likely to happen at all. Maintain a healthy tension when interpreting this measure.

The CBOE's crude oil VIX measures implied volatility on USO. For those who are looking to trade a product not directly related to US equities with a decent bit of vol on it, this could be a worthwhile product to consider at present.

Much like SPX vol, crude VIX is down by more than 50% since hitting its peak (do note, however, that crude vol maxed out closer to Thanksgiving, whereas SPX vol notched its highest levels just prior to Christmas).

Wrap Up

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

Robin, I think you're in some good company here. It really would not be the least bit surprising or unhealthy to see a pullback or "bear raid", as you put it.

As mentioned above, even with these VVIX levels, there is plenty of room for a decent pull in either direction on VX futures.

Thank you for reading.

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.