By Mike Dickson, Ph.D.
Treasury yields are takin’ it easy
Volatility in the Treasury bond market has fallen to its lowest level in nearly four years—a potential sign of good things to come for mortgage rates, the economy, and the stock market.
The Merrill Lynch Option Volatility Estimate Index (MOVE Index), which measures expectations of future volatility in yields on U.S. Treasury securities, is currently below 70 (see the chart). That hasn’t occurred since December 2021, shortly before the Fed began raising interest rates to combat inflation. (Like its better-known cousin, the Cboe Volatility Index (VIX Index), which measures expected volatility among stocks, the MOVE index is calculated from implied volatility from options markets.)
Translation: Investors don’t expect Treasury yields to swing significantly higher or lower over the near term. That’s important, because stability in the U.S. Treasury market gives investors greater clarity about the valuations of riskier assets such as domestic and international stocks—as well as greater confidence in those assets’ return potential.
MOVE Index
Additionally, falling interest rate volatility could help push mortgage rates lower, in turn, boost overall economic activity.
Treasury yield volatility could potentially move even lower from here, given this week’s widely predicted Fed interest rate cut and investors’ expectation that another cut will occur at the Fed’s December meeting. Relatively stable economic data and a steady march toward a roughly 3% federal funds rate already implied in futures prices would likely help boost consumer sentiment—and give investors the confidence they need to keep supporting stock prices.
Originally published by Horizon Investments
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The Merrill Lynch Option Volatility Estimate (MOVE) Index reflects the level of volatility in U.S. Treasury futures. The Cboe Volatility Index® (VIX® Index) is a leading measure of market expectations of near-term volatility conveyed by S&P 500 Index®(SPX) option prices. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. Information obtained from third party sources is believed reliable but has not been vetted by the firm or its personnel
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