A duration ‘crisis’ for markets
Amid volatility, fixed income markets look to a key barometer
Published
March 2023
ICE Fixed Income & Data Services
Managing Partner at Simplify Asset Management
There’s been plenty of action in global bond markets recently, with central bank meetings, inflation data, and banking sector concerns reflected in some big yield moves. One indicator we’re watching is the ICE BofA MOVE Index, a key measure for bond market volatility. ICE’s President of Fixed Income & Data Services Amanda Hindlian recently spoke to MOVE index creator and Managing Director at Simplify Asset Management Harley Bassman, to get insight on what this index is signaling.
Amanda Hindlian: Harley, we see indicators for equity volatility cited frequently by media, yet it’s the bond market which tends to signal macroeconomic trends ahead of equities. We’ve recently seen huge relative jumps in the MOVE, which hit its highest level in over 13 years. What’s that telling us about fixed income investors’ mindset, and how should we think of it in a historical context?
Harley Bassman: Let's start at the 30,000 foot vantage. What’s happening here is fundamentally different that the GFC in 2008/09. The GFC was a credit crisis, specifically, the risk that the debts/loans/bonds would not be fully repaid at par (100%). Today we have a duration crisis, basically a mismatch between the maturity of the assets (bond portfolio) and the liabilities (bank deposits).
Now, if you’re a "mark-to-market" Wall street dealer or hedge fund, those risks are functionally similar; but if you are an FDIC regulated bank, these risks are different.
Right now, the great uncertainty is the path of interest rates as pushed by the Fed and market concerns of inflation versus recession. This uncertainty is significant and is visible in the bond market as measured by the MOVE Index. The credit risk is less of a concern, and so the equity market hasn’t been as volatile, and the related VIX Index is much closer to its long-term average.
I’ll add that both the MOVE and the VIX are highly correlated to the realized volatility of each asset class. And over the past month, the components of the MOVE have been quite volatile, while the actual volatility of the S&P 500 has been rather subdued.
Amanda Hindlian: We’ve seen liquidity conditions change abruptly in some sovereign bond markets, such as in UK Gilts last fall, when the BOE stepped in with a temporary stability program. To what extent can the MOVE indicate potential liquidity issues lurking under the surface?
Harley Bassman: The components of the MOVE have been realizing about 175, coincident with a MOVE Index of 160 to 180. Since the MOVE is a measure of the projected volatility over the next month, and the MOVE is still clipping well above 150, this implies the market believes volatility will not abate soon.
Amanda Hindlian: We had a closely watched Fed meeting this month. I understand the MOVE is not a leading indicator of the direction of interest rates. Can we deduce anything about market expectations around Fed action by activity in the MOVE?
Harley Bassman: A MOVE above 150 implies continued risk. The interesting prospect is whether it maintains this level after the rate decision in March. I’d expect the MOVE to decline after the Fed turns over their last card but if not, that’s a bad omen for risk assets.
Amanda Hindlian: A law of thermodynamics says “volatility is only transmuted”. We’ve seen heavy Fed intervention in the market since COVID. To what extent are traditional fixed income indicators - like the yield curve, credit spreads, and the MOVE - distorted by central bank intervention in bond markets?
Harley Bassman: As I mentioned in my commentary "The Chips are Down" there’s a disconnect between the shape of the yield curve and the level of the S&P 500. Recent events have only tossed sand into the gears as we haven’t resolved whether the Fed can engineer a soft landing.
To the extent the MOVE remains elevated, we can deduce that this uncertainty has not been resolved. I remain solidly in the camp that CPI inflation will not decline below 4.0% in calendar 2023, nor will core PCE decline below 3.00% as labor driven service inflation will continue to rage driven by a labor shortage sourced from retiring Boomers and restricted immigration. While many well-educated pundits disagree, this is also the same chattering class who predicted that inflation was ‘transitory’.
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