Volatility Remains Elevated Across Markets
Investors think the Jackson Hole speeches will cause some fireworks.
I was going back and forth with a friend a few minutes ago trying to figure out why equity implied volatility - the VIX structure in particular - remains bid in the face of higher equities. We came to the following conclusion:
1. Odds of fireworks from the Jackson Hole speeches over the next 36 hours that include the heads of the Fed, ECB, and Bank of England.
2. The market is still rattled from the large spike in vol at the end of last month and is not in a hurry to sell it as quickly again. As the saying goes, you can sell vol 364 days a year and go broke on day 365.
3. Vol was already crushed earlier this week due to war risk in the Ukraine subsiding. The September contract (August settled yesterday) is down 0.3-0.35 since last Friday.
My thinking is that it is a mix of 1 and 2.
Implied volatility in Treasury futures options similarly remains very well bid. The straddle expiring Friday for the September 10yr future is pricing in a 8.4bps move for the 7yr (remember the cheapest-to-deliver for the 10yr future is a 7yr), which would be somewhat large fireworks. That would equate to a roughly 6.2bps move for the 10yr, relatively speaking. The 5yr future is pricing in a roughly 8.4bps move. Ultra futures and TLT options are factoring in a 2.6bps move, which is frankly on the low side. However, this is probably correct because the topic of discussion is more related to the front end.
So the market is pricing in some significant volatility from Jackson Hole.
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