Market participants perceive a lack of liquidity in the Treasury market and are concerned that more frequent volatility flashes will ensue. Yet Treasury traders appear complacent about short-term Treasury volatility, and are not pricing it high. The price of Treasury volatility is reflected in the spread between expected Treasury volatility (the CBOE TYVIX Index) and realized Treasury volatility. The average value of the spread represents the premium that investors are prepared to pay to avoid volatility. As shown in Figure 1, this spread is in a low range compared with its value in previous years.
The week ended amid disappointing manufacturing and weak employment statistics –10-year Treasury yields dipped below 2 percent Friday on news that U.S. nonfarm payrolls gained just 142,000 jobs and August and July monthly data was revised downward. Combined with persistent uncertainty about global growth, weaker data are pushing the expected date of an increase in the federal funds rate target further out. This has depressed TYVIX and sustained VIX.
Term Structure Developments