Sometimes the stock market comes across as a noisy little brother.
When stocks get volatile, they cause a lot of commotion. News headlines blare, and pundits share their two cents about the outlook. That draws all the attention from investors.
But if stocks are the little brother, then bonds are the big brother.
The global value of bonds vastly exceeds stocks. At $140 trillion, the global fixed-income market is the second largest in the world. (The currency market takes the top spot.)
And lately, one metric of bond market volatility jumped to the highest level of the year.
Yet it’s gone by mostly unnoticed by traders.
So today, let’s look at why it matters – and how it can lead you to trading opportunities…
Tracking Volatility
Volatility describes price swings. Higher volatility equals more and bigger ups and downs.
I’ve written about the CBOE Volatility Index (VIX) recently. Wall Street’s “fear gauge” tends to jump when stocks are selling off.
But the bond market has its own volatility measure…
The Merrill Lynch Option Volatility Estimate tracks volatility in U.S. Treasury securities. That name is a mouthful, though, so traders refer to it as the MOVE Index.
Here’s a chart of the MOVE Index since late last year:
Similar to the VIX, the MOVE Index sees sharp moves in both directions.
A quick spike higher points to volatility in Treasurys picking up. A mean-reverting move lower usually follows.
Similar to stocks, the MOVE Index tends to jump when Treasurys are selling off.
And you may notice that the MOVE Index just spiked to its highest level of the year (the arrow).
That’s an important signal…
When volatility picks up in Treasurys, you should be on the lookout for trading opportunities.
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Volatility Is Surging Higher
Any time volatility spikes, smart traders know there’s an opportunity at hand.
That goes for any market, including bonds.
That’s why I’m watching assets like the iShares 20+ Year Treasury Bond ETF (TLT).
Take another look at a chart of the MOVE Index alongside TLT:
The black line is the MOVE Index, and the blue line is TLT.
Volatility usually moves higher when Treasury bond prices drop. That’s signaled by TLT moving lower in the chart.
But a spike in the MOVE Index can also be a sign that a pullback in Treasury bonds has gone too far – and a mean-reverting move is possible.
Look at the circled areas on the chart. They show when the MOVE Index saw a quick spike higher this year.
Now look at the price action in TLT when that occurred. A peak in the MOVE Index often happens just before or right as a near-term bottom in TLT forms.
There’s no guarantee that every spike in Treasury volatility will see a short-term bottom in bond prices.
But with the MOVE Index recently at its highest level of the year, it’s time to pay attention to Treasury bond prices…
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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