Macro Volatility Digest
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SPX® Skew Signals Longer-Term Caution Despite Rally
Implied volatilities fell across asset classes last week following the US-China tariff reprieve, with equity and credit implied volatilities dropping the most. The VIX® index fell almost 5 pts while VIXIG (IG credit vol) declined over 7 pts – both are now trading below their long-term averages. In contrast, VIXTLT (20+Yr Treasury Volatility Index) increased wk/wk as both inflation breakevens and term premium continued to widen. Following Moody’s downgrade, US 30Y yield is now over 5%.
Read MoreLink to Report: Macro Volatility Digest
WHAT STANDS OUT:
- Implied volatilities fell across asset classes last week following the US-China tariff reprieve, with equity and credit implied volatilities dropping the most. The VIX® index fell almost 5 pts while VIXIG (IG credit vol) declined over 7 pts – both are now trading below their long-term averages. In contrast, VIXTLT (20+Yr Treasury Volatility Index) increased wk/wk as both inflation breakevens and term premium continued to widen. Following Moody’s downgrade, US 30Y yield is now over 5%.
- The decline in index vol was notable as single stock volatility remained mostly unchanged. In other words, the decline in the VIX was almost entirely driven by a collapse in implied correlation levels, with COR1M index down over 13 pts to 16%. The options market is signaling once again a return to stock fundamentals with macro risks receding (i.e. high dispersion, low correlation) – how long that can last remains to be seen.
- SPX skew diverged across tenors last week, with short-dated skew flattening on the back of upside call buying while longer-dated skew steepened on renewed hedging demand. The contrast can be seen in SPX 1M vs. 6M call skew. While short-dated call skew jumped higher last week from the 28th to 80th percentile high, longer-dated call skew remained fairly tepid. This suggests most of the call buying has been tactical upside chasing rather than any positive shift in the longer-term outlook. In fact, longer-dated put skew has been steepening on this rebound.
Chart: Tactical Call Buying vs. Longer-Term Caution
Source: Cboe
