Macro Wrap – Markets Are Generally Able to Digest Gradual Price Behavior, $TLT, $SPY

by Enis August 20, 2013 8:21 am • Commentary

Global volatility is gradually rising for various asset classes.  Implied volatility for most assets is now higher than their 52 week moving averages, a rare occurrence over the past 18 months, a period of especially depressed volatility.  The absolute level of volatility is still low by historical standards, but the recent, correlated move higher is noteworthy:

VCA Screen, 3 month at-the-money implied volatility (blue) vs. 52 week average (orange), courtesy of Bloomberg
VCA Screen, 3 month at-the-money implied volatility (blue) vs. 52 week average (orange), courtesy of Bloomberg

With the exception of crude oil and the EUR / USD cross, every other asset is very close to or well above its 52 week moving average.  Currency implied volatilities are well above the average, as is gold (which could be considered a currency).  Most importantly though, bond market volatility pricing has increased as well:

30 day implied volatility of TLT, Courtesy of Bloomberg
30 day implied volatility of TLT, Red line at 15, Courtesy of Bloomberg

What surprises me about this chart, however, is that Treasury bond volatility is not higher.  Despite all the headlines, this has been a very orderly selloff since the high in early May (an almost 20% move lower in TLT since then).  Perhaps that is one reason why it has not affected stocks more severely.  Markets are generally able to digest gradual price behavior.  It is the sudden movements that create the panic.

The FOMC minutes tomorrow, and then Jackson Hole commentary later in the week will set the table for the next macro move in the market.  And while volatility pricing has increased in the past week, traders are still not pricing in much movement for the rest of August.  10 day SPX realized volatility is at 9, even after 4 straight down days.  Volatility is higher, but that’s simply because it was near the lows of the year at the start of the month.  Close-to-close volatility is still nothing to write home about.