Rates Volatility Nears 1-Year Low Ahead of FOMC

Mandy Xu

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March 19, 2024

Weekly Market Commentary: March 18, 2024

Cross-Asset Volatility: Implied volatilities fell across most asset classes last week as CPI inflation came in stronger than expected, reinforcing the Fed’s cautious stance. The probability of a June rate cut fell from 65% to 51%, with the market now expecting less than 3 rate cuts this year (~2.8 to be exact, down from ~6 at the start of the year). Interest rate volatility led the decline, with the MOVE Index down 3 nms and falling to near a 1-year low of 97 bps vol. Notably, implied vol for both HYG and LQD hit a 1-year low last week (see Exhibit 1). Gold volatility normalized meaningfully, with GLD 1M ATM vol down over 2 pts to 11.9%. FX volatility came in broadly, led by USDJPY vol which is notable ahead of tomorrow’s key BOJ meeting where expectations of a rate hike are building.

Exhibit 1: Corporate Bond Volatility at a 1-Year Low

^{Source: Cboe}

Equity Volatility: Index vols saw a modest bid last week as equities struggled in the face of higher rates. Not surprisingly, QQQ led the increase, with 1M ATM vol up 0.7 pt to 18.0% (57th percentile). In contrast, RTY vols fell even as small caps sold off, with the RTY 1M ATM vol down almost 2 pts to 19.7% (53rd percentile). As Exhibit 2 shows, the RTY-SPX® implied volatility spread has normalized significantly over the past month, with the 3M spread narrowing from 9.3% to 5.9% while the QQQ-SPX spread has remained steady. EM risk has also subsided as China stabilized off the lows, with the MXEF-SPX volatility spread falling from a high of 4.9% to now just 1.1%.

Exhibit 2: Relative Vol Spreads (QQQ, RTY, MXEF vs. SPX)

^{Source: Cboe}

Skew: SPX skew was mostly unch’d at the front-end of the curve, but steepened modestly further out, with 3M skew (25- delta spread) widening from 3.4% to 3.7%, still screening in the 12th percentile low.

Term Structure: SPX term structure flattened further last week, with the 1Y-1M vol spread narrowing from 3.7% to 3.4% (20 th percentile high), led by the front-end of the curve.

Correlation and Dispersion: Despite the Fed meeting, all eyes are on NVDA this week ahead of their AI conference. NVDA 1M implied vols are back to the highs last seen before their earnings release while skew is even more inverted (NVDA 1M 25-delta skew hit a 16-year low of -9.5% last week). The frenzy in NVDA options has had a pronounced spillover effect into other stocks, as we highlighted last week, leading to a pronounced surge in average single stock volatility relative to the index. This has kept SPX implied dispersion extremely elevated, as seen in the DSPXSM Index which jumped to near a 1-year high last week (especially notable as we’re outside of earnings) before retracing to 28.6% on Friday (still in the 83rd percentile high over past year).

Exhibit 3: NVDA Skew at 16-Year Low Ahead of AI Event

^{Source: Cboe}

Cross-Asset Volatility Monitor

^{Source: Cboe}

Cross-Asset Volatility Snapshot (10Y Lookback)

^{Source: Cboe}

Cross-Asset Correlation Matrix (1M)

^{Source: Cboe}

Cross-Asset Correlation Analysis

^{Source: Cboe}

Macro Equity Volatility

^{Source: Cboe}

VIX Index Volatility

^{Source: Cboe}

US Index Volatility

^{Source: Cboe}

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