CBOE’s indicators of expected volatility for Treasuries, equities and foreign exchange rate — TYVIX, VIX, EUVIX, JYVIX, BPVIX) — turned cooler this week. All but BPVIX are below their historical median values since 2003. The driver of the move was the decidedly more dovish tone of the FOMC’s announcement on Thursday. The Fed policymakers also announced their decision not to change (raise) the fed fund target rate – but that decision had been fully anticipated. The FOMC’s decision to hold off from tightening rates in their latest meeting aligns U.S. monetary policy more closely with policies in Europe and Japan, where central banks are accelerating monetary stimulus.
Figure 1. Comparative volatility levels: VIX, TYVIX and foreign exchange indicators
Figure 2. Weekly update of volatility levels
The apparent lack of investor anxiety signaled by lower VIX numbers is echoed by weekly decreases in VVIX, a measure of the expected volatility of VIX, and by the SKEW, a measure of the perceived probability of a catastrophic decline in U.S.
After upheavals in the latter part of 2015, the two measures have returned close to their values of a year ago.
Figure 3. Current measures of SKEW and VVIX
Let’s Contango Forward
The term structure of the VIX is in strong contango, which suggests that equity investors may not be as calm as all that. They are concerned that fear could resurface by mid-2016. Similarly, the term structure of BPVIX has a strong upslope, probably in expectation of the BREXIT referendum (to decide whether or not the United Kingdom should exit the European Union). The term structures of TYVIX, EUVIX and JYVIX are flat.