Move Index—Bond Market Volatility

Many of us are familiar with the VIX Index, commonly referred to as the “Fear Index”. 

The VIX Index is a measure of “fear” as that relates to equity markets and typically rises during periods of falling prices, sometimes sharply during more precipitous declines.

 

Move Index

Did you know there's an index that gauges fear in the bond market? Originally created by Merrill Lynch, it's now called the ICE BofAML MOVE Index.

This index measures how much investors expect interest rates to fluctuate. When there's worry about rising rates, the index goes up. It climbed sharply during the 2013 Taper Tantrum, reflecting heightened concerns about interest rate increases.

The index rises as concerns grow that interest rates are on the march higher. The index will rise more sharply when there are fears in the market that rates may be headed significantly higher as was the case during the 2013 Taper Tantrum.

Key Points to Understand:

• Implied Volatility: The MOVE Index measures the market's perception of future volatility, not the actual volatility that has occurred.  
• Treasury Bond Futures: The index is based on options contracts on Treasury bond futures with maturities of 2, 5, 10, and 30 years.   
• Higher Index Value: A higher MOVE index value indicates increased expected volatility in the Treasury market, suggesting heightened uncertainty and potential risk.   
• Lower Index Value: A lower MOVE index value indicates lower expected volatility, suggesting a more stable interest rate environment.  

Why is the MOVE Index Important?

• Risk Assessment: The MOVE Index helps investors assess the level of risk in the bond market.  
• Portfolio Management: It can be used to make informed decisions about asset allocation and risk management strategies.  
• Trading Opportunities: Traders may use the MOVE Index to identify potential trading opportunities based on changes in market volatility.   

In summary, the MOVE Index is a valuable tool for understanding and analyzing the volatility of the U.S. Treasury bond market. By tracking changes in the index, investors can gain insights into market sentiment, potential risks, and potential trading opportunities.

Figure 1.  MOVE Index (11/2002 to 09/2024)

Is Now the Time for Bonds?

As depicted in Figure 1, the MOVE index reached a notably high level of 147.92, surpassing even the panic levels seen during the COVID-19 pandemic. This led some to question the wisdom of investing in bonds in October 2022. Tatiana Darie suggests that the answer depends on one's overall outlook.

While rising yields might seem attractive, bonds haven't always been a winning bet during central bank tightening. Darie believes it's a good strategy only if you anticipate a recession soon.

With the MOVE Index at 98.03 on September 13, 2024, and some analysts predicting a recession, now might be a favorable time to invest in bonds.

References

1.  VIX (Wikipedia)
2. The Move Index
3. What's the MOVE Index and Why It Might Matter? | Charles Schwab