In our recent post "Treasuries vs Equities and Forex volatility - A Tale of Three volatilities", from the 21st of March, we looked at a historical chart showing the relative valuations of benchmark indicators for short-term implied vols in the three main asset classes (equities / forex / rates):
-Rates : Merril Lynch’s MOVE Index showing the trend in 1-mth atm implied volatility 2 / 5 / 10 and 30Y Treasuries options.
-FX : Credit Suisse’s CVIX Index showing the trend in FX main pairs atm 3month implied volatility on 9 major currency pairs.
-Equities : SPX 3mth options atm implied volatility (much more reliable than the VIX which is currently polluted by several technical factors).
Our good cross-asset friend argued at the time that disconnections in cross-asset vol markets generally do not last long. The rebound in US Treasuries rapidly led to a fast correction of Implied Volatilities for Rates as indicated in the updated graph enclosed below - source Bloomberg:
The small sell-off in US Treasuries had led to a strong spike in Implied Volatilities for Rates, which was not followed by similar moves in other asset classes, namely equities and forex, unusual, given their extreme correlation in recent months.
"The lower you fall, the higher you'll fly."