Back in mid March we cited an article by Harley Bassman that noted the extreme complacency in the MOVE index. The MOVE index is the bond markets equivalent of the VIX. Mr. Bassman explained what he calls the “beta gamma volatility index”:
“But returning to our main point, a reading below 80 tends to presage a market problem. The reason for this signal is fairly obvious. To have an “event”, the market must be unprepared. A simple measure of the market’s preparedness is the willingness of investors to buy “risk insurance”. Since Implied Volatility is the cost of insurance, the MOVE is just such a measure. The lower this Index, the less demand there is for risk protection.
There are two observations that one can make from this chart. The first is that the lower the MOVE at the bottom of the cycle, the higher it leaps at the top of the cycle. Unfortunately, the other fact is that the MOVE can remain at a low level for quite awhile before the “event” occurs.”
This was near the time when I was aggressively shorting the equity markets – “recovery” chatter was rampant and complacency levels were very high. Extreme complacency is represented by readings below 80 while extreme fear is consistent with readings over 120. As you can see from the chart below the MOVE index, at a close of 110 yesterday, is showing neither complacency nor extreme fear. Equity shorts looking for some sort of extreme market collapse are likely to be disappointed. As Marc Faber recently said, if we’re on the verge of an equity market crash it’s the most well telegraphed crash of all time. Major events tend to surprise investors.
Perhaps more interesting, however, is that this index is not exhibiting the same characteristics that it did back in Q4 2008 when there truly was an irrational rush into bonds. At the time, I said shorting long-term treasuries would be the trade of 2009. What I did not say was that the treasury market was a bubble at that point. So, what’s interesting here is despite all the incessant discussions over a bond bubble the bond market’s VIX is relatively benign. Is the treasury market perhaps mildly overbought? Sure, but excessively optimistic and irrational? I don’t think so. The MOVE index verifies as much.