Complex Products Adding to Treasury Volatility
While income investors are certainly enjoying higher yields this year, the past decade had not been as kind. The low to flat interest rates over the past ten years may have helped propel the economy and markets since the financial crisis, but they also made it quite difficult for investors to find income. So, Wall Street firms got creative and created complex investment products that offered higher yields. But with rates rising this year, those same products are putting firms at risk, which is why they're jostling to hedge those positions by investing in derivatives that benefit from higher volatility in the market. However, those derivatives are making volatility in the US government bond market even worse. Treasuries were already experiencing massive swings as investors bought derivatives to lessen their bond risk, while dealers made long-volatility bets to hedge their own exposure. This combination led to a huge jump in the MOVE Index, which measures the implied volatility of Treasuries via options pricing. In October, the index breached 160, which is near the highest level since the financial crisis. With additional money betting on the ups and downs of bond yields, this is only going to add more fuel to the fire.
Finsum:As firms increase in their purchases of volatility-linked derivatives to hedge risk, the treasury market is expected to become even more volatile.
- volatility
- Treasuries
- fixed income
- yields
