Zero Hedge and Bond Volatility

There are two things that most financial markets professionals have in common. First, we all read Zero Hedge. Second, we don’t admit we read Zero Hedge. Before people get upset, the second part is a joke. This morning as I got settled in at The Options Institute I came across a tweet from Zero Hedge showing a disconnect between the 10 Year Yield and the S&P 500. To see what I’m talking about you can click on the link below –

Of course when I read anything about the markets I think…VIX. In this case my first thought was about VXTYN, which is the CBOE/CBOT 10 Year US Treasury Note Volatility Index. VXTYN is based on option prices on the 10 Year Treasury Note Futures that trade at the Chicago Board of Trade (CME Group). If the Ten Year is supposed to follow along with the S&P 500 then it may be worth checking out to see if VXTYN and VIX have any sort of relationship. After painstaking quantitative work, the result is they don’t. In fact we (giving Hannah credit for the leg work) got the closing prices for VXTYN, VIX, the S&P 500, Yield on US 10 Year Treasury Yield, and just for the heck of it we threw in the iShares 20+ Year Treasury Bond ETF (TLT). The table below shows the correlation for the daily price changes from January 28, 2008 to July 28, 2014.


The result is another Seinfeld blog where I take ‘nothing’ and make it into a story. In all seriousness, there is something to the lack of relationship between VIX and VXTYN. This is where things get a bit subjective, but there is always a reason for market behavior. The opinion as to what the reason is may result in this lack of connection between VXTYN and the other instruments in the table may have to do with the behavior of the option prices on the 10 Year Treasury Futures. It just may be that since interest rates are very sensitive to economic numbers that at times the implied volatility of TY options would move up in front of an FOMC meeting or Employment report from the Labor Department. Interestingly enough, we have both on the calendar this week. So for now, we plan on watching the market reactions and VXTYN price action before and after both numbers and putting up a summary this coming weekend.