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Market Volatility Bulletin: Treasury Vol Tracking Lower, But The Trend Is Still Moving Up

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Includes: AAXJ, AGG, BNDX, DDM, DIA, DOG, DXD, EEH, EMB, EPS, EQL, FEX, HUSV, IEF, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TLT, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VGK, VOO, VTWO, VV
by: The Balance of Trade
Summary

Sovereign yields are pretty quiet today.

Secular change can come pretty quickly, and in unexpected ways. Still, markets always carry the capacity to surprise.

TYVIX is settling down, but the trend looks higher, which may disturb positive progress in risk assets.

A look at EMB volatility.

Market Intro

Despite equity indices (SPY, VGK, AAXJ) trading largely higher on newfound trade optimism (or so the story goes), sovereign 10Yr yields (IEF, TLT, BNDX) are fairly quiet.

Spot S&P VIX now prints just below 20.

Thoughts on Volatility

RIP, Quantitative Tightening. The Fed's balance sheet is likely - at best - stuck in permanent plateau mode. There's always some good reason or other not to reduce the balance sheet, and some important-enough cause for supplying more liquidity in some form or other.

When the US national debt is over $22T, I question the extent to which US Treasury bonds are truly "pristine". Still, to date the US Treasury department has never defaulted on a debt obligation since inception, so from a mechanical standpoint, that's good enough from a funding standpoint.

Secular changes can sneak up on you though. I doubt many in the newspaper business saw the internet as any kind of existential threat.

Consider that, when compared to 1915, both the US population as well as literacy rates are much higher. When Treasury yields finally do turn higher, the vol levels we see will probably rise quite a bit, in no small part due to the fact that there will likely be many intermittent bear traps in T-Bonds as the "flight-to-quality" trade periodically exerts itself.

Still, surprises don't always need to be negative. Nations do not always need to stand alone (no way Greek debt would trade this way without tremendous intervention). Markets always carry the capacity to surprise.

During the "Oxi" vote in July 2015, Greek 10Yr yields hit very near to 20%. Now the same instruments require 1.45%. For the time being, the US in many respects remains the "cleanest dirty shirt" - at least for large liquid pools.

Bond Yields and Volatility

CNBC- 10:30AM EST

As reported earlier, US Treasuries are really not on the move much for today's session. Just over a month ago, the 30YR was trading at a yield below the 3Mo T-Bill.

As the Fed reduces its short-term rate, the front end of the yield curve is very likely to drop. Good chance we'll get another such drop in late October at the next FOMC meeting, which will in turn potentially reduce inversion at some points along the yield curve.

The 10YR UST VIX is gradually mellowing, though still nowhere close to where we saw it at its all-time low print in Feb of this year (at 3.42).

Some of the tremors of the late summer are subsiding in the Treasury market. The trend is still higher though, and I believe other markets are highly disrupted when "safe" US Treasuries experience a pick-up in volatility.

There's a lot that can impact US Treasury vol at the moment. China is, after all, a major holder of our debt, and we are currently in the midst of trade discussions with de facto one of the Treasury department's largest lenders.

FinanceYahoo!

Emerging markets bond (EMB) vol has been on the high side of late. The table above relates to a five-year span, so the last month's realized vol on the EMB has been just shy of making it into the highest decile.

Chart Data by YCharts

Like many risk assets, EM debt has enjoyed a pretty decent run since December '18. The ramp higher in realized vol (total return basis) has taken its toll on the fund, but vol levels are likely still low enough to justify the far meatier yield that one gets on EMB (close on 5.5%) vs. a large basket of US fixed-income instruments, such as AGG (currently offering a 2.7% yield).

Wrap-Up

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