{"id":72441,"date":"2023-10-13T23:54:54","date_gmt":"2023-10-14T03:54:54","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/tracking-volatility-in-10-and-30-year-treasuries\/"},"modified":"2023-10-13T23:55:02","modified_gmt":"2023-10-14T03:55:02","slug":"tracking-volatility-in-10-and-30-year-treasuries","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=72441","title":{"rendered":"Tracking Volatility In 10 And 30-Year Treasuries"},"content":{"rendered":"<div data-test-id=\"content-container\">\n<p><figure class=\"getty-figure\" data-type=\"getty-image\"><picture>  <\/picture><figcaption> <\/figcaption><\/figure>\n<\/p>\n<p><em>By Craig Bewick<\/em><\/p>\n<h2>At a glance<\/h2>\n<ul>\n<li>Treasury options traders began pricing the 2-year yield risk to the downside and 10 and 30-year to the upside beginning in July.<\/li>\n<li>With both intraday and historical options values available, traders can use the CVOL Index to identify short-term changes in volatility and diversions from historical normal levels.<\/li>\n<\/ul>\n<p><em>The 10-year Treasury note and 30-year bond suddenly moved to their highest yields in 16 years on Oct. 3. While few could have predicted such a move, a closer look at treasury market volatility reveals a trend of yield expectations moving incrementally higher on the long end of the yield curve over the past few months.<\/em><\/p>\n<p>Recent futures and options price action in CME Group Treasury products provide an illustrative case study for using the valuable CVOL tool.<\/p>\n<p>CVOL measures 30-day forward-looking implied volatility, incorporating every strike price on the implied volatility curve.<\/p>\n<p>The inclusion of every strike in the index calculation provides market participants with a representative value of implied volatility levels in each options series, and the simple variance methodology makes the index calculation straightforward and easy to understand.<\/p>\n<p><span>In addition to calculating 30-day implied volatility, CVOL also generates several other measures, including <\/span>skew<span>. Skew refers to the idea that different strikes and calls and puts, even on the same underlying and expiration, can trade at different implied volatility levels.<\/span><\/p>\n<p>We will use CME Group Micro Treasury Yield futures as a proxy for on-the-run Treasury rates and CVOL in yield terms based on CME\u2019s standard Treasury options in the current paper.<\/p>\n<h3>Treasury Volatility Since July<\/h3>\n<p>In early July 2022, the 2-year and 10-year U.S. Treasury yields inverted, meaning that the 2-year began yielding a higher rate than the 10-year. This is a closely watched relationship, as such inversions have historically predicted an economic recession.<\/p>\n<p>This inversion has persisted, and the magnitude of the inversion approached 100 basis points in March 2023 and again in July. Incidentally, the 2-year has also yielded higher rates than the 30-year throughout this time.<\/p>\n<p>On July 28, 2023, the 2s versus 10s inversion traded at a level of -81.5 basis points (and the 2s vs 30s traded at -73.8 basis points).<\/p>\n<p><figure><img decoding=\"async\" src=\"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/10\/saupload_Treasury-CVOL-charts_1200x627_v2-chart1.png\" alt=\"2-10 Yr treasury spread\" loading=\"lazy\"><\/figure>\n<\/p>\n<p>On that same day, the skew, again in yield terms, of the 2-year began to diverge from that in the 10 and 30-year. The 2-year skew became negative, indicating a put skew, while the 10 and 30-year continued to trade with a call skew.<\/p>\n<p>In other words, Treasury options traders began pricing the 2-year yield risk to the downside and 10 and 30-year to the upside.<\/p>\n<p><figure><img decoding=\"async\" src=\"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/10\/saupload_Treasury-CVOL-charts_1200x627-chart2.png\" alt=\"2-10-30 Yr treasury skews\" loading=\"lazy\"><\/figure>\n<\/p>\n<p>This divergence in skew continued and, in fact, became more pronounced through late September:<\/p>\n<p><figure><img decoding=\"async\" src=\"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/10\/saupload_Treasury-CVOL-charts_1200x627-chart3.png\" alt=\"2-10-30 Yr treasury skews\" loading=\"lazy\"><\/figure>\n<\/p>\n<p>During that same time, the difference between the 2-year and 10-year yield declined from 81.5 basis points to just over 50 basis points (and the 2s versus 30s declined to about 42 basis points):<\/p>\n<p><figure><img decoding=\"async\" src=\"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/10\/saupload_Treasury-CVOL-charts_1200x627_v2-chart4.png\" alt=\"2-10 Yr treasury spread\" loading=\"lazy\"><\/figure>\n<\/p>\n<p>As you can see, based on CVOL skew levels, the options market began pricing in a move toward a \u201cless steep\u201d inversion of the U.S. Treasury Yield curve in late July.<\/p>\n<p>Over the next couple of months, the inversion of the 2s\/10s and 2s\/30s did, in fact, decline by about 30 basis points.<\/p>\n<p>Then on Oct. 3, the 10-year note yield moved above 4.8%, and the 30-year bond moved above 4.9%, reaching those multi-year highs and flattening the yield curve even more.<\/p>\n<p>To be clear, a skew shift will certainly not always predict a price move in the underlying, and there are many dynamics involved in options pricing.<\/p>\n<p>For example, sometimes we see an upward move in implied volatility after a period of depressed levels simply because the market might perceive relatively lower levels as an opportunity to buy \u201ccheaper insurance.\u201d<\/p>\n<p>However, the scenario described here is a good example of what can be learned from analyzing options pricing, particularly using the CVOL tool.<\/p>\n<p>Of course, the CVOL tool also represents a source for options traders to explore trading opportunities. With both intraday and historical values available, traders can use it to identify short-term changes in volatility, skew and convexity, as well as diversions from historical normal levels, similar to what we\u2019ve seen recently in the treasury market.<\/p>\n<p><em>Original Post<\/em><\/p>\n<p><strong>Editor&#8217;s Note:<\/strong> The summary bullets for this article were chosen by Seeking Alpha editors.<\/p>\n<\/div>\n<p>Read the full article <a href=\"https:\/\/seekingalpha.com\/article\/4640763-tracking-volatility-in-10-and-30-year-treasuries?source=feed_all_articles\" target=\"_blank\" rel=\"noopener\">here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>By Craig Bewick At a glance Treasury options traders began pricing the 2-year yield risk to the downside and 10 and 30-year to the upside beginning in July. With both intraday and historical options values available, traders can use the CVOL Index to identify short-term changes in volatility and diversions from historical normal levels. The [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":72442,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-72441","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Tracking Volatility In 10 And 30-Year Treasuries | iFintechWorld<\/title>\n<meta name=\"description\" content=\"By Craig Bewick At a glance Treasury options traders began pricing the 2-year yield risk to the downside and 10 and 30-year to the upside beginning in\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=72441\" 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