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By Craig Bewick
FEB 25 2021

US Equities fell today as US Treasury yields at the longer end of the curve continued to rise.  With the decline in Equity prices we saw a substantial increase in the implied volatility in the equity index options at CME Group, particularly in the E-mini Nasdaq-100 where 30-day implied has risen from 20.5% to about 33% in the last two weeks. 

We thought the rise in US Treasury yields was worth highlighting again today.  As of late morning, today’s decline in prices represents the following one day changes in implied yield in the following futures contracts:

  • Ultra-Bond 2.2284% to 2.3414%
  • 30-Year Bond 1.8111% to 1.9435%
  • Ultra 10-Year 1.4378% to 1.6086%

For the second day in a row, we’ve included a video produced by CME Group Economist, Erik Norland, in which he explains the current move in longer term Treasury yields in the context of inflation expectations and continuing negotiations around further COVID-19 stimulus in the US.  As he explains in the video, one measure of inflation expectation is the difference between Treasury Inflation Protected Securities (TIPS) which are instruments in which the premium is adjusted according to inflation and standard Treasury instruments.  According to this measure, the market is currently pricing in 2.2% inflation over the next decade which, as Erik explains, is a fairly substantial increase over recent levels but not extraordinarily high given historical norms.   Nevertheless, the rise in longer term yields bears watching as further increases could potentially impact investors allocation of capital towards equities versus fixed income. 

This move in US Treasury futures prices (and corresponding yield moves) has not been lost on the CME Group Treasury  Options markets.  As the QuikStrike image below illustrates nicely, implied volatility in the 30-Year US Treasury Bond option has risen from under 8% to over 14% in just the last couple of weeks.  Also, on February 12th, the 25 Delta Calls and Puts were trading at just about the same implied volatility; today, the Puts are trading nearly 4% over the Calls as Put sellers demand relatively more premium against further downside price moves.

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ABOUT THE AUTHOR

Craig Bewick has spent 25 years in futures and options markets, starting at CBOT and CME working in risk management, regulatory, technology, product management and client development. 

Connect with Craig at activetrader@cmegroup.com

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