VXTYN Measures Volatility in U.S. Treasuries and Potential Spillover Effect

Recently I have been highlighting some non-traditional measures of volatility and risk in the financial markets, including VXEEM (CBOE Emerging Markets ETF Volatility Index); DXJ (WisdomTree Japan Hedged Equity Fund); and DBV (PowerShares DB G10 Currency Harvest Fund). Part of my intent in focusing some attention on these largely under-the-radar indices and ETPs is to get more investors to think about risk more broadly across geographies and asset classes.

One asset class that should absolutely be watched closely by even those stubbornly equity-centric investors (and I know you are out there in larger numbers than you care to admit) is U.S. Treasuries. Of course U.S. Treasuries come in quite a few flavors, but the most important is probably the U.S. 10-Year Treasury Note. In a display of impeccable timing, last month the CBOE and the CFE teamed up to launch a new volatility index based on this security: CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (VXTYN).

In the chart below, I show the path of VXTYN and the SPX going back to January 10, 2013, which is the beginning of the historical data for VXTYN provided by the CBOE. Note that VXTYN only began rising in May and when hit has made a substantial move up, that has preceded a decline in stocks.

[source(s): CBOE, Yahoo, VIX and More]

Just for fun, I am also including a chart that shows a 21-day rolling average of the correlation between VXTYN and the SPX. Here the relationship between the swings in correlation and subsequent moves in stocks may be easier to visualize. With less than months of historical data to draw on, I would caution against jumping to conclusions regarding correlation and causation, but at the very least I thought this graphic might provide some food for thought.

[source(s): CBOE, Yahoo, VIX and More]

Last but not least: did you know there are ETPs for placing bets on whether the Treasury yield curve will get steeper or flatter? I highlighted these products back in 2010 in Treasury Yield Curve ETNs and Volatility; they are known formally as the iPath US Treasury Steepener ETN (STPP) and the iPath US Treasury Flattener ETN (FLAT).

Related posts:

• VXEEM as a Measure of Emerging Markets Volatility and Risk
• Using DXJ to Monitor Development in Japanese Equities, Currency and Risk
• The Currency Carry Trade, DBV and Risk
• Chart of the Week: U.S. 10-Year Treasury Note Yields from 1990
• Treasury Yield Curve ETNs and Volatility
• Chart of the Week: Ratio of VIX to Yield on 3-Month T-Bills
• Recent Developments in Gold and Gold Volatility
• EuroCurrency Volatility Index (EVZ) at Lowest Level Since March 2008, Diverges from VIX
• Chart of the Week: Crude Oil and Volatility
• The Risk Library
• A Conceptual Framework for Volatility Events
• Forces Acting on the VIX
• St. Louis Fed’s Financial Stress Index

Disclosure(s): long DXJ at time of writing; the CBOE is an advertiser on VIX and More

Using DXJ to Monitor Developments in Japanese Equities, Currency and Risk

Since Tuesday’s The Currency Carry Trade, DBV and Risk clearly resonated with quite a few investors who are struggling to put their arms around what is going on in Japan and what the implications are for U.S. equities and other asset classes, I thought I would follow up today by focusing attention on an important ETP that can be used as an indicator or for speculation and hedging: the WisdomTree Japan Hedged Equity Fund (DXJ).

As the name suggests, DXJ is designed to be long Japanese equities, with no exposure to fluctuations in the Japanese yen, due to hedging of the currency. As WisdomTree puts it:

“The Fund employs an investment approach designed to track the performance of the WisdomTree Japan Hedged Equity Index. The Index and the Fund are designed to provide exposure to equity securities in Japan, while at the same time hedging exposure to fluctuations between the value of the U.S. dollar and the Japanese yen. The Index and the Fund seek to track the performance of equity securities in Japan that is attributable solely to stock prices without the effect of currency fluctuations.”

While DXJ was launched back on June 16, 2006, it was not until January 15, 2013 that options began trading on this product. The introduction of options is particularly notable in that while DXJ’s price provides an aggregated view of Japanese equities net of currency fluctuations, one can also use the implied volatility data from the options prices to determine how market participants see the risk and uncertainty in currency-hedged Japanese equities going forward. The chart below shows a three-month view of DXJ, with 30-day implied volatility (red line) remaining above 20-day historical volatility (blue line) for the past five weeks, though these numbers have converged this week. Not surprisingly, options volume has picked up substantially in DXJ as of late and there has been a bullish bias (calls = green, puts = red) in that volume. What I find even more interesting, however, is that implied volatility in DXJ appears to have peaked on June 5^th.

With USD/JSP breaking below 94 earlier today, clearly there is a great deal of volatility in the yen that is being hedged away by DXJ. If one were to be interested in buying Japanese equities on the dip and also wish to eliminate the currency exposure found in the likes of EWJ, then DXJ is an alternative worth considering.

On the other hand, if one is interested in monitoring Japanese equities and currency movements in one issue and/or tracking the market’s assessment of risk and uncertainty (via implied volatility), DXJ could certainly be a useful tool for those purposes as well.

[source(s): LivevolPro.com]

Related posts:

• The Currency Carry Trade, DBV and Risk
• The Risk Library
• A Conceptual Framework for Volatility Events
• Forces Acting on the VIX
• St. Louis Fed’s Financial Stress Index
• Fukushima Daiichi and ‘Event Theta’

Disclosure(s): long DXJ at time of writing; Livevol is an advertiser on VIXandMore