Where Are We Heading With Volatility?
Author: Marco Santanche
Hedge funds drop their shorts on US Treasuries
Over the past week, we have seen a weakening of inflation in the US, suggesting that the economy is improving.
As seen in the latest data from the Commodity Futures Trading Commission, there has been heavy liquidation of short positions on US Treasuries since February 2021. Open interest has fallen for the 10-year note contract, and the net buying of hedge funds for their short 10-year notes contracts suggests the closing of many losing positions, as from July 7 the September futures earned almost 2%.
However, as we reported weeks ago, the bets were placed in mid-May, and it appears the performance of this short position has been positive for those joining the pack back in the Spring. The worst seems to be over for US 10-year notes, and we all expect a rebound in late July, when the Federal Reserve should be raising rates again, according to the FedWatch tool and polls.
Volatility: where are we heading now?
The level of the VIX is so low now that everyone expects a surge in volatility over the next few months. What should happen to see a new spike in IV?
Well, a comeback of inflation might be insufficient this time. Risk is very low and even with less supportive data, the fight against the price rally seems to be at a turning point.
I expect the VIX to stay low for quite some time, maybe until the end of the year. An unforeseen shock is the only catalyst that might bring some fear to the market, maybe with other financial companies struggling, but it seems a very distant possibility at the moment.
A low volatility environment like the current one is stimulating options trading on the S&P 500 and the VIX itself though, and it seems a great entry point, should anything happen. The only problem is timing the events, as the current calm sea remains stable.
This content is for educational purposes only and is NOT financial advice. Before acting on any information you must consult with your financial advisor.