Key Takeaways with Craig
Despite a PPI number that reflected continuing increased inflation, US Stock prices staged a broad rally today. Perhaps the market was encouraged by reports that the Russian Defense Ministry said it was pulling some of its troops away from the Ukraine border. This development may have also contributed to a decline in WTI Crude Oil futures prices, which were down by about 3.75% today. Implied volatility in the options markets in both WTI Crude Oil and Equity Indexes declined today, but remains elevated versus the levels we’ve seen over the last month.
CME Group US Treasury Futures were active again but today the yield curve steepened. According to the Micro Treasury futures, the 2-Year Treasury yield fell by 2 basis points, the 5-Year yield was up by 1 basis point and the 10 and 30 Year yields were up by about 5 and 6 basis points respectively. We’ve recently seen more of a flattening move in the yield curve whereby the difference between short term and long term rates has decreased.
None of this yield curve action is lost on CME’s Treasury options markets as we’re seeing three month highs in implied volatility (“vol”) (though we did see a slight downtick today). The blue line in the QuikStrike graph below shows the substantial increase we’ve seen in vol in the US T-Bond options over the last several trading sessions. Remember, since CME doesn’t list options on its Micro Treasury futures, we use the traditional US Treasury futures options to get a measure of Treasury options vol. These futures contracts are traded in terms of price, which moves inversely to yield. According to the 25 Delta Risk Reversal in the US T-Bond options, Puts have been bid relative to Calls lately as well. Again, those Puts are based on the price of the US Treasury, not yield, so the heightened vol represents protection against further downside price moves and upside yield moves.
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