Key Takeaways with Craig
CME Equity Index futures prices were higher overnight and then rallied further after this morning’s PPI report indicated lower than expected inflation numbers. While the Dow closed just slightly higher, the Nasdaq was up by nearly 1.5%. Interestingly, E-mini S&P 500 implied volatility in options that expire in 30 days was trading higher today, though the Calls were bid over the Puts, according to the 25 Delta Risk Reversal. Yesterday the 25 Delta Puts were trading about 7.6% higher than the Calls; today that difference was just 4.6%.
US Treasury yields fell today as indicated by CME’s Micro Treasury Yield futures contracts. The Micro 2-Year yield was down by a few basis points less than the 10-Year, leading to a further widening of the inversion between those two tenors. The top image below shows that, at about 55.5 basis points, the 2-Year is trading as high relative to the 10-Year as it has since the yield curve inverted earlier this year.
We used CME CVOL data to construct the lower graph in the image below. The blue (2-Year Yield) and orange (10-Year Yield) lines represent the CVOL levels, year-to-date, in those two tenors. As you can see, after falling over the last several weeks, volatility in both the 2 and 10-Years has risen this week. Also, in 2022, 2-Year volatility has generally been higher than that of the 10-Year yield. However, to put that in historical context, we plotted the average closing CVOL level in both instruments from October, 2013 through the end of 2021. As you can see, historically, 10-Year volatility has tended to trade higher than 2-Year volatility so this year is an anomaly to that. Further, this year’s levels are substantially elevated relative to the last nearly a decade as the US economy has seen 40-year highs in inflation readings.
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