MOVE Index and Treasury Yields – Correlation but Likely No Causation

The Merrill Lynch Option Volatility Estimate Index (MOVE) is the bond market’s equivalent of the Chicago Board of Options Exchange Volatility Index (VIX), and helps to gauge the current level of fear or complacency in fixed income markets. Since launching in April 1988, the index has averaged a reading of approximately 97, but it has averaged just 70 over the last five years. On July 18, 2017, it dipped below 50 for the first time since May 9, 2013. In fact, the index has shown a reading of less than 50 just 11 days in its nearly 30-year history.

So, what can very low bond market volatility tell us about the future direction of interest rates? The answer is: Disappointingly little. There appears to be correlation with large moves in 10-year Treasury yields when the MOVE is at extreme levels; however, a closer look at history leads us to believe this correlation does not imply causation, as the below table shows.

All of the index readings below 50 occurred between late April and early May 2013. The bond market may have been complacent at the time; however, the driver of higher yields was former Federal Reserve (Fed) Chairman Ben Bernanke’s comments about tapering Fed bond purchases, which led to the period’s aptly named “Taper Tantrum.” Although bond market complacency at the time may have exacerbated upward moves in rates, it certainly did not cause them.

Conversely, very high MOVE readings (above 200) occurred between late September and December 2008, during a period of extreme equity market volatility and weakness. 10-year Treasury yields tumbled 40% in the fourth quarter as equity market turbulence led investors to flee riskier assets and allocate to perceived safe-havens such as U.S. Treasuries. The high readings in the MOVE (a high level of fear in the bond markets), therefore, seemed to be a symptom of the same problem that led to the drawdown in yields, but not the cause of them.

While the MOVE index may well gauge current sentiment in the markets, its predictive power in the direction and severity of yield moves appears lacking.


The economic forecasts set forth in the presentation may not develop as predicted.

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The VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500. It is a market-based estimate of future volatility. When sentiment reaches one extreme or the other, the market typically reverses course. While this is not necessarily predictive, it does measure the current degree of fear present in the stock market.

The Merrill Option Volatility Estimate is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options.

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