MOVE can provide an early alert regarding a changing risk sentiment in the bond market but also in in the general financial markets, ahead of the equity markets.

The MOVE Index measures U.S. interest rate volatility. The index tracks the movement in U.S. Treasury yield volatility implied by current prices of 1-month OTC options.

• Created in 1988, MOVE stands for ‘Merrill Lynch Option Volatility Estimate’
• The MOVE index tracks the movement in U.S. Treasury yield volatility
• Intercontinental Exchange (NYSE: ICE) acquired MOVE from Bank of America Merrill in 2019, along with a family of fixed income volatility indices
• The measured volatility is based on 2-year, 5-year, 10-year, and 30-year U.S. Treasuries
• The average reading since inception is around 103

Key Takeaways

• The bond market tends to signal significant changes ahead of the equity market
• MOVE is 'the VIX for Bonds, by having a history of solid signals regarding the sentiment of the bond market
• MOVE can be used in conjunction with the VIX (explained below) to define general market risk and investor sentiment

 

 

The Correlation of MOVE to the VIX and the US equity markets

A spike in both VIX and MOVE reflects turmoil in the financial markets. On the other hand, low readings of both these indexes are a sign of normal market conditions.

• Both the MOVE and the VIX are based on options pricing
• Both the MOVE and the VIX calculate 1-month volatility
• The MOVE and the VIX indexes tend to be closely correlated (0.80)

What Is the VIX (Cboe Volatility Index)?

VIX is a real-time volatility index that reflects the market’s expectations regarding the volatility of the S&P 500 Index for the next 30-days. VIX is closely monitored by many investors as it has historically provided a reliable insight into equity market risk.

Chart: The correlation between MOVE and VIX (monthly chart)

The correlation between the bond and equity markets

Historically, there is a correlation between the bond and equity markets. One good reason is that any change in the level of interest rates highly affects both markets.

• When interest rates are going up, or expected to go up, bond prices and equity prices generally fall
• When interest rates are going down, or expected to go down, bond and equity prices generally advance

There are other factors that affect both markets in the same direction, for example, political risk, business risk, and any legislation regarding capital flows. The following chart shows that the MOVE index peaks during turbulence in the S&P 500.

Chart: The correlation between MOVE and the S&P 500

 

◘ The MOVE Volatility Index and the Correlation to the S&P500

G.P. for TradingCenter.org (c) July 2022

 

MOVE Index Links:

• https://finance.yahoo.com/quote/%5EMOVE/
• https://markets.ft.com/data/indices/tearsheet/summary?s=MOVE:PSE