Market Volatility and Treasury Spreads – A Strong Relationship

There is a strong relationship between implied vol and the slope of the yield curve.  As volatility increases, there is downward pressure on yields of Treasuries with greater mispricing in shorter duration bills. Investors “look ahead” in anticipation of changes in volatility.

The optimism of stock market investors is often not shared by investors in Treasuries.  During times of uncertainty, investors demand safer securities, the price of Treasuries increase, and the corresponding yields can decrease significantly.

As we are currently in a period of high uncertainty and a steep volatility skew, it becomes important to follow implied market volatility, Treasury prices and the dynamics of the yield curve.