“The current equity volatility environment is supremely challenging,” Jeremy Wien, head of VIX trading at JPMorgan Chase & Co. in New York, wrote in a March 30 e-mail. “Do we buy volatility at low levels relative to the last few years because of the headline risks, or do we sell volatility because the market is hardly moving?”
Investors have piled into exchange-traded products, or ETPs, betting the volatility decline won’t last. The number of shares outstanding for 17 of these products that increase when the VIX rises has jumped more than fivefold this year, according to data compiled by Bloomberg.
Shares of the Barclays Plc’s IPath S&P 500 VIX Short-Term Futures ETN, the largest ETP that climbs when the VIX increases, jumped fivefold this year to a record 114.3 million on March 23, boosting its market value to as much as $2.18 billion on March 19. The price of the note is down 53 percent this year.
Demand for Credit Suisse Group AG’s VelocityShares Daily 2x VIX Short Term ETN, known by its ticker symbol TVIX, pushed shares outstanding to 54.2 million, up almost 11-fold since the end of last year. The Zurich-based bank on Feb. 21 stopped issuing shares “due to internal limits on the size of the ETNs,” according to a statement at the time. The market capitalization of the note reached almost $700 million on March 6. The TVIX, which lost 77% this year, aims to generate twice the daily return of an index tracking VIX futures.
Swings in Treasury yields have been subdued as the Fed’s pledge to keep borrowing costs low anchored short-term rates and concern about European sovereign-debt crisis made investors reluctant to sell U.S. debt. The 10-year Treasury yield moved between 1.79% and 2.16% in the four-month period ended Feb. 28.
Bank of America Merrill Lynch’s MOVE Index, which measures volatility based on prices of over-the-counter options on Treasuries maturing in two to 30 years, fell to 69.9 basis points on March 12, the lowest since July 2007. The index ended last week at 78.6 basis points.
“The potential for more quantitative easing has grown over the last week,” Brian Svendahl, Minneapolis-based senior portfolio manager of fixed income at RBC Global Asset Management Inc., said in an interview on March 29. His firm oversees more than $250 billion in assets. “We are likely a few data points away -- or even a European explosion away -- from more monetary accommodation.”
Wall Street’s largest bond trading firms think the worst is likely over for the Treasury market as the pace of economic activity wanes amid U.S. budget cuts and $100-a-barrel oil. After reaching as high as 2.4% , the 10-year Treasury note yield ended the quarter at 2.21% . The yield on the benchmark 10-year note will finish 2012 at 2.48% , according to the median estimate in a Bloomberg News survey of the 21 primary dealers that trade with the Federal Reserve.
Stability in global interest rates helped damp swings in exchange rates over the quarter. A simultaneous fall in options prices and demand for hedges suggests currency derivatives investors may also be underestimating the risk of broad swings in foreign-exchange, according to Caio Natividade of Deutsche Bank AG.