Meet The VIX Of Bonds
As the MOVE index hits YTD highs, we talk through the reasons and implications.
Most investors have heard about the VIX, a commonly used fear gauge that’s linked to short-dated option prices on the S&P 500. However, we’d wager that half of them haven’t heard about the MOVE index, the bond market’s equivalent measure of vol.
Given that this week, the MOVE index hit fresh year-to-date highs above 127 (see below), it warrants a closer inspection. Today, we wanted to run through what the index is, what the move higher could indicate, and what cross-asset trade ideas this could help us tee up.
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What Is The MOVE Index?
The full name of the index is the Merrill Lynch Option Volatility Estimate Index. This roughly can be shortened to MOVE (MLOVE doesn’t sound as catchy). It’s a widely followed measure of volatility in the U.S. bond markets, which specifically tracks the implied volatility of U.S. Treasuries.
At a basic level, the index reflects the market's expectations for future price movements in U.S. Treasuries by measuring the implied volatility of options on Treasury securities with different maturities (2-year, 5-year, 10-year, and 30-year bonds).
By factoring in different tenors, it provides a broader measure of the entire U.S. Treasury market’s volatility expectations, as opposed to just one maturity segment. This is seen as a positive, although one drawback of the index is that it just focuses on Treasuries. So, to get a picture of implied vol in the corporate space or for other sovereign nations, this isn’t the place to look.
It’s similar to the VIX in the sense that a higher reading is often met with concern from traders, with the potential for a large move about to happen.
Learning From Historical Moves
As the first chart shows, the MOVE index traded down to levels around 50 back in the summer of 2020 for around a year, while it spiked to 200 during March 2023.
So there’s a clear wider range of movement that investors are used to that have simply spent time observing the VIX mean reverting to 16-18.
Let’s first run through the period of low volatility that the index tracked in 2020/21. Note the below chart which shows the Fed Funds Rate in orange, alongside the MOVE index.
After the initial period of the pandemic in 2020 when interest rates were slashed, they stayed low until the hiking cycle started in 2022. In the period between that, Treasuries remained remarkably calm, with a few reasons for this.