CBOE and CME team up to launch US Treasury ‘VIX’

Jun 3rd, 2013 | By | Category: Alternatives / Multi-Asset

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The Chicago Board Options Exchange (CBOE) has teamed up with the CME Group (CME) to launch the CBOE/CBOT 10-year US Treasury Note Volatility Index (VXTNY).

CBOE and CME team up to launch US Treasury ‘VIX’

The new index applies the methodology of the CBOE Volatility Index (VIX) to futures options data on 10-year US Treasuries.

The new index provides a measure of expected volatility specific to the fixed income market by applying the methodology of the widely followed CBOE Volatility Index (VIX) – Wall Street’s so-called ‘fear gauge’ – to futures options data from CME Group’s 10-year US Treasury note contract.

The index, which will be calculated and published by the CBOE, has been developed in collaboration with Antonio Mele and Yoshiki Obayashi of Applied Academics, a think tank that helps bridge the divide between commerce and academia.

Richard DuFour, CBOE Executive Vice President, said: “We’re pleased to introduce an interest rate volatility index based on one of CME Group’s most active interest rate options products. Interest rate derivatives also represent the largest asset class in the over-the-counter market. The addition of the CBOE/CBOT 10-year US Treasury Note Volatility Index to CBOE’s already extensive list of volatility-related indexes broadens and diversifies the scope of asset classes on which users can measure volatility.”

Derek Sammann, CME Group’s Senior Managing Director of Interest Rate and FX Products, added: “CBOE’s VIX index is a world-renowned measure of implied volatility, and we are very pleased to collaborate with CBOE on the development of an index based on CME Group’s highly liquid 10-year US Treasury note option contracts. We believe this CBOE/CBOT Volatility Index will serve as a strong benchmark to help our global customers manage their exposure to market volatility.”

The index comes at a time when investors are becoming increasingly alert to heightened volatility in bond markets. While fear of sovereign default in Europe has been the main focus over the past few years, more attention has recently turned to the US market, where investors are trying to figure out what exactly will happen when the Federal Reserve winds down QE, and to Japan, where bond markets have become jittery on concerns that the Bank of Japan‘s huge stimulus programme will push up long-term interest rates.

On the back of the success of the VIX, the CBOE has become the leading index provider in the volatility space, calculating and disseminating benchmark data on over two dozen different volatility-related products. Examples include the CBOE EuroCurrency Volatility Index (EVZ), known as the ‘Euro VIX’, which measures the market’s expectation of 30-day volatility of the USD/EUR exchange rate by applying the VIX methodology to options on the CurrencyShares Euro Trust ETF (FXE), and the CBOE Gold ETF Volatility Index (GVZ), which measures the market’s expectation of 30-day volatility of gold prices by applying the VIX methodology to options on the world’s largest gold ETF, the SPDR Gold Shares (GLD).

A number CBOE’s volatility indices have also been adopted as underlyings for exchange-traded products (ETPs). Among the largest is the iPath S&P 500 VIX Short Term Futures ETN (VXX) issued by Barclays. This product is linked to the S&P 500 VIX Short-Term Futures Index and has almost $1.5 billion in assets. Given the success of this product and others in the space, coupled with the importance and liquidity of the US Treasury market, is seems feasible that an ETP based on the new index could one day become a reality, giving investors a new tool to hedge their bond market exposure.

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