MOVE to a New Low

The MOVE Index hit a new all-time low today of 49.24bps as the S&P 500 rallied to an all-time high; the average since the inception of the index is 101.71bps.

Explanation

The Merrill Lynch MOVE Index, according to Bloomberg, is a “yield curve weighted index of the normalized implied volatility on 1-month Treasury options.” In basic terms, the MOVE Index shows what the option market is pricing in (or implying) regarding a change in interest rates across the yield curve; it takes a weighted average of that implied market move, annualizes them, and then normalizes the figures (puts them in the context of current interest rates).

Long-Term Trend

MOVE Index Bloomberg(r)

MOVE Index Monthly 1988 Bloomberg(r)

 

MOVE Index Daily 2007 Bloomberg(r)

MOVE Index Daily 2007 Bloomberg(r)

We reached the all-time high on 10/10/2008 of 264.6bps, and we’ve been in a strong downtrend since. 10yr yields hit year-to-date lows of 1.64% yesterday, and remained mostly flat throughout today’s session. This price relationship makes sense; a rally in price sends yields lower and volatility inevitably starts to “come-in.” For more tangible evidence of low volatility in Treasuries, reference the fact that throughout most of April, the 10yr Treasury was within +/- 3bps of 1.7%.

Takeaway

The S&P 500 is sitting at an all-time high, VIX cash is low at 13.52, and credit markets are currently pricing in the smallest change in interest rates across the yield curve in the history of the MOVE Index. Yields of course will eventually have to rise when there is a shift in the fundamental picture domestically and in Europe. Clearly, the options market does not see that shift coming anytime soon. Treasury volatility will remain low, barring tail events, as long as the Fed keeps pumping money into the system.

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