Presentations on Interest Rate Volatility and the VXTYN Index

The topic of volatility of interest rates and bonds has the potential to be of huge concern and importance to many individual and institutional investors in the next few years.

On Thursday at the 31st CBOE Annual Risk Management Conference in Carlsbad, presentations on Interest Rate Volatility were delivered by –

  • Yoshiki Obayashi, Managing Director, Applied Academics, LLC and
  • Basil Williams, Co-Chief Investment Officer, Mariner Investment Group.


The speakers presented more than a dozen excellent advanced charts on interest rates and volatility. Here are three more basic charts and a table I created in order to give you an introductory overview and update on key topics.


The CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (ticker symbol: VXTYN®) measures the expected volatility of the price of 10-year Treasury Note futures. The price of these futures is tied by arbitrage to the price of 10-year U.S. Treasury notes, which are a core instrument of the U.S. fixed income market. Futures on 10-year Treasury Notes are the most actively traded futures on U.S. Treasuries. CFE launched VXTYN futures for trading in November 2014. VXTYN provides a measure of expected volatility specific to the fixed income market. This is important because, historically, the volatilities of equities and Treasuries have often followed distinct paths. The index is calculated from CBOT’s options on 10-year Treasury futures using the same methodology as VIX®. Consequently, VXTYN represents the variability of percentage changes in the price, as opposed to the yield of 10-year Treasury notes. Price and yield volatility are related to each other through duration, and yield volatility is typically higher than bond price volatility.

I find it interesting to note that in the Historic Volatility Since 1970 chart, the historic volatility of the U.S Treasury rates generally has been higher than that of the S&P 500 over the past couple of years.


As shown in the Correlations of Weekly Returns table, the correlations since June 2008 were negative 0.70 for the SPX and VIX indexes, but positive 0.18 for the VXTYN Index and the 10-year U.S Treasury rates.


Topics covered in their presentations included —

– Historical perspectives on rates and rate volatility, and a prognosis of what will drive markets this year

– Complementary dynamics between equity and interest rate volatilities

– Rate volatility hedging and trading strategies involving OTC and listed products including VXTYN futures


Mr. Obayashi noted that —

  • Investor anxiety about the future of interest rate movements has been creeping back into the market following an initial spike when QE taper talk started.
  • Correlations between VXTYN and fixed income portfolios kick up when concerns about interest rate volatility become heightened.
  • On sharp drawdowns in bond portfolios, VXTYN tends to experience outsized movements, thereby smoothing bond portfolio returns hedged by VXTYN futures.
  • In stark contrast to VIX, both the model-predicted and market-observed VXTYN futures term structure is often in backwardation, suggesting that investors could get paid to be long rates volatility.
  • The dynamics between VXTYN and returns on portfolios of specific fixed income assets, such as mortgages, muni bonds, and TIPS all differ from one another.
  • CBOE’s VXTYN and SRVX indexes are not ad hoc weighted averages of model-dependent ATM volatilities, but are grounded in a rigorous theory of fixed income variance pricing.


Yoshiki Obayashi is a managing director at Applied Academics LLC in New York. The company specializes in developing and commercializing ideas emanating from a growing think tank of academic researchers selected on the basis of their work’s relevance to practice in the finance industry. His most recent projects range from running systematic trading strategies for funds to developing fixed income volatility indexes for Chicago Board Options Exchange. Yoshiki previously managed US and Asian credit portfolios for a proprietary fixed-income trading group at an investment bank. He holds a PhD in Finance and Economics from Columbia Business School.

Basil Williams joined Mariner in 2013 as the Firm’s Co-Chief Investment Officer and is a member of Mariner’s Management and Investment Committees. Formerly, he was the CEO of Concordia Advisors and portfolio manager for its multi-strategy mandates. Mr. Williams continues to manage Concordia’s multi-strategy mandates and actively participates in Mariner’s investment activities. Mr. Williams has more than 20 years’ experience managing fixed income-related trading portfolios. He began his career with Merrill Lynch & Co. in 1980, where he was responsible for the development of its New York sales trading teams in fixed income futures and options. In 1988, he joined Barclay Investments, a broker-dealer, which provided quantitative analysis of global fixed income markets. In 1994, Mr. Williams became affiliated with Concordia as head of its fixed income trading group, and in 2006 was appointed Concordia’s CEO. Mr. Williams holds an M.B.A. in Finance from New York University and a B.A. in Applied Mathematics from Brown University.