Even though it sounds a bit like a broken record, US Equity Indexes lacked direction again today as the debate over further stimulus for COVID-19 continued. Ultimately, the major US stock indexes closed mixed with the Dow Jones and S&P 500 up slightly and the Nasdaq down a bit. Despite the uncertainty around stimulus, tonight’s debate and the US Presidential election in less than two weeks, implied volatility ticked down today.
US Treasury futures prices continue to move lower at the long end of the curve. In fact, according CME Group Treasury Analytics (https://www.cmegroup.com/tools-information/quikstrike/treasury-analytics.html) the implied yield in the Ultra T-Bond, US Bond, Ultra 10-Year Treasury and 10-Year Treasury futures are as high as they’ve been since early June.
The options price and volatility action in the longer-term Treasury products has been interesting as well. The top QuikStrike graph below nicely illustrates the decline in prices (orange line – remember price and yield move inversely to one another) and dramatic rise in volatility (blue line). Additionally, the lower graph depicts the 25 delta Call volatility minus the 25 delta Put and shows that the Puts have been bid relative to the Calls over the last several weeks (though Calls were bid in the last few days). So, while the Federal Reserve has indicated that it aims to keep short term interest rates low for the foreseeable future, the long-end remains active and, with the amount of Treasury debt expected to be issued in response to different stimulus packages, is worth watching.