Overview
Stifel has identified bond volatility as a compelling trade opportunity, arguing that option-implied risk appears inexpensive relative to recent realized moves. The firm notes that the MOVE Index and the iShares 20+ Year Treasury ETF (TLT) are trading near one-year lows even though last week saw a selloff in U.S. Treasuries, with the 2-year, 5-year and 10-year notes all rising roughly 18-20 basis points.
Volatility and market signals
Stifel's observed volatility indicators show a notable divergence between equity option-implied fear and actual market movement. The VIX has climbed above 25 from 19 on February 27, and skew profiles have steepened across major ETFs. Despite that, the equity market has not matched the level of fear implied by options: the S&P 500 30-day realized volatility sits at 12, creating an approximate 14-point spread to the VIX.
The firm concludes that rates volatility appears cheap; in their assessment, index realized moves have not yet tracked to where implied volatility is priced. Stifel also records that the MOVE Index and TLT are trading near one-year lows, and at another point notes the MOVE Index near two-year lows while TLT volatility sits with a 12 handle.
Recommended trade and rationale
For a scenario in which the real economy weakens, Stifel lays out a specific options structure: buy the TLT May 91 call for $0.97. That premium represents 1.1% of the referenced spot price, with an initial delta of 32.2, and the reference spot level given at $88.54. The firm presents this as a way to express a directional move in long-duration Treasuries while taking advantage of what it views as inexpensive rates volatility.
Cross-asset observations
Stifel reviewed four prior U.S. military actions in the Middle East and tracked the subsequent week-over-week moves in oil and U.S. Treasuries. The firm highlights that Treasuries selling off alongside rising oil is atypical. It points to the current juxtaposition of low MOVE readings and the unusual co-movement between oil and bond selling.
Across equities and ETFs, implied moves are rising broadly. QQQ and SPY show elevated implied-move pricing relative to their eight-week averages. By contrast, QQQ, IWM and TLT remain priced more in line with their realized ranges, while many sector ETF implied straddle moves trade at a premium of 50 basis points or more.
Near-term market catalysts
Key scheduled events for the coming week include the Consumer Price Index (CPI) release on Wednesday and Oracle Corporation earnings on Tuesday. Stifel notes that Oracle's one-month put skew is in the 70th percentile, indicating some elevated bearish activity. Separately, option-adjusted spreads (OAS) for credit continue to widen.
Summary takeaways
- Stifel views rates volatility as relatively cheap versus implied pricing and realized moves.
- The firm recommends a directional TLT May 91 call trade as a way to express exposure to long-duration moves in a weakening-economy scenario.
- Implied volatility has increased across many asset classes, but realized measures have not uniformly followed through.