You know, at a certain point this just becomes laughable and almost not worth mentioning.
But then again, we need to keep track of it because if things ever do return to some semblance of normalcy, we’ll at least be able to say we were cognizant of the inherent absurdity.
Everyone knows that cross-asset vol. is suppressed. And everyone knows that’s part and parcel of the global central bank liquidity tsunami.
But as it turns out (and we’re going to keep this short and sweet because it’s Friday afternoon which means readers have the attention span of Donald Trump on meth), it’s not just cross-asset vol. that’s depressed – even the incoming econ data is stuck in a low vol. regime.
Have a look at this:
The punchline here though, is that even given an economic data surprise, rates’ sensitivity has diminished materially over the past 15 or so years.
In other words, the incoming data is itself less volatile, but even when it comes in hot or cold (as defined by a 1 standard deviation surprise), rates simply don’t respond.
The delta and the beta
From a high-level, interest rate moves are typically driven by price action on key economic data days. These days in turn drive the average level of volatility – For market makers to price in a high level of implied volatility, event days need to be perceived to deliver large moves with the rest of the calendar showing below average daily changes.
We choose the five most watched economic indicators encompassing growth and inflation in a calendar month – nonfarm payrolls, durable goods, retail sales, core CPI and PCE. We then see both the trend in surprises and how 5y yields move on the days when the actual prints surprised consensus estimates. We define large surprises as prints that saw actual vs. consensus differences exceed rolling 1y standard deviation. The exercise shows two clear results:
- The diminishing delta. First, as illustrated in Chart 3, economic data themselves do not move around as much now as they used to be. Simply said, the data have not been that volatile.
- The fading beta. Second, given a level of economic data surprise, the rates market is no longer responding with the same vigor relative to the past. Chart 4 shows that 5y yields now barely move 4bp on key days with a 1 standard deviation surprise. With the most meaningful days delivering 4bp on average, it is understandable why the level of implied volatility over a calendar month has to average lesser.
While the former could be a function of a mature business cycle (06-07 also saw low economic data volatility), the latter is likely attributable to the global central bank put after the financial crisis.