MOVE INDEX NOT SHOWING COMPLACENCY IN BOND MARKET
Back in mid March we cited an article by Harley Bassman that noted the extreme complacency in the MOVE index. The MOVE index is the bond markets equivalent of the VIX. Mr. Bassman explained what he calls the “beta gamma volatility index”:
“But returning to our main point, a reading below 80 tends to presage a market problem. The reason for this signal is fairly obvious. To have an “event”, the market must be unprepared. A simple measure of the market’s preparedness is the willingness of investors to buy “risk insurance”. Since Implied Volatility is the cost of insurance, the MOVE is just such a measure. The lower this Index, the less demand there is for risk protection.
There are two observations that one can make from this chart. The first is that the lower the MOVE at the bottom of the cycle, the higher it leaps at the top of the cycle. Unfortunately, the other fact is that the MOVE can remain at a low level for quite awhile before the “event” occurs.”
This was near the time when I was aggressively shorting the equity markets – “recovery” chatter was rampant and complacency levels were very high. Extreme complacency is represented by readings below 80 while extreme fear is consistent with readings over 120. As you can see from the chart below the MOVE index, at a close of 110 yesterday, is showing neither complacency nor extreme fear. Equity shorts looking for some sort of extreme market collapse are likely to be disappointed. As Marc Faber recently said, if we’re on the verge of an equity market crash it’s the most well telegraphed crash of all time. Major events tend to surprise investors.
Perhaps more interesting, however, is that this index is not exhibiting the same characteristics that it did back in Q4 2008 when there truly was an irrational rush into bonds. At the time, I said shorting long-term treasuries would be the trade of 2009. What I did not say was that the treasury market was a bubble at that point. So, what’s interesting here is despite all the incessant discussions over a bond bubble the bond market’s VIX is relatively benign. Is the treasury market perhaps mildly overbought? Sure, but excessively optimistic and irrational? I don’t think so. The MOVE index verifies as much.
MOVE Index
Well, well, well. We’ve certainly got a very nice bond discussion going on. My private motto is: “A discussion always stimulates the braincells”.
The MOVE index is – IMO – misleading because the VIX index is about stocks which have an infinite maturity while bonds have a defined and limited maturity. Therefore comparing the MOVE index with the VIX is comparing apples and oranges.
I think the Yield curve is a better gauge of what’s going on in the markets. The yield curve started to flatten last April/May but NOW (it seems) the yield curve is about to steepen again.
Willy, considering the avg holding time for a UST is under 2 weeks, I’d say the ‘maturity’ angle is less relevant.
fwiw, expect a 2.50% 30y a year from now. this is a nice buying opp. TMF works well.
No, the price of the 30 year bond is about to collapse. PragCap had a recent posting in which Charles Biderman said that the majority of the investors have poured a massive $ 900 billion into bonds. So, where is the additional demand going to come from ?
http://pragcap.com/bull-vs-bear-4
And currently I am short the 30 year bond. I expect the 30 year yield to go to, say 5, 6, 7, or perhaps even 8% this year. And that’s the death toll for the US mortgage market. And for markets every where else in the world. When I look at e.g. dutch and german longer term maturities then they move in lockstep with US 30 and 10 year bond prices.
Charles Biderman again nailed it. “”Flow follows Performance”". So, if money is moving out of the 30 year bond too long then that 30 year bond WILL go down in price, no matter what. compare it with what happened to the Nasdaq in 1999 and 2000. I expect a similar pattern for the bond market.
TPC:
What are your thoughts on Elliot Wave Theory?
BB
“Faber recently said, if we’re on the verge of an equity market crash it’s the most well telegraphed crash of all time.”
Faber also said “The Bond Market Is The Mother Of All Bubbles”
bond market investors are showing excessive pessimism which is why they are in bonds in the first place. Mutual fund inflows are running hard into bond funds as people have thrown in the towel on equities. I’m betting that many people that are recent converts to bonds are less than nimble and really don’t understand the risks of their “safe” bond investments.
kk
“Many people that are recent converts to bonds are less than nimble and really don’t understand the risks of their “safe” bond investments.”
Yes and Bond Fund performance is base on total return to date not on yield to maturity. At this stage why take any risk for such a low return.
Japanese could make money buying US stocks in the 90′s. US investor can make money buying in to other markets to day. Why focus on investing in a deleveraging ecomomy.
I agree with Marc faber. while everyone focusses on the stockmarket the REAL disaster is about to happen in the bondmarket(s).
Interestingly today, *the* Taylor (of Taylor Rule fame) said that his rule predicted Fed funds of ~0.75%. Which contradicts many many people, including Krugman, who say the rule predicts anything from -5 to -8 %. This would be quite a shock since everyone has been predicting 0% for 2-3 more years based on the <<0 fed funds prediction. 0% is significantly below 0.75% which will also add to the rotation out of bonds as people realize that the EM bubble trade will be back on.