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Is Volatility Dying ?

28 May 2014 by HCM

There has been plenty of talks recently regarding the very low volatility observed in the market. Over the last few days, Citigroup and JPMorgan even cited it as a source of concerns and guided down expected revenues from their trading desks. In equities, VIX is very near its all-time low at less than 12%. In credit, the basis (the difference between the theoretical value of an index computed with the prices of its individual constituents and its quoted value) is a good indicator of the velocity of the market. Indices are usually one step ahead of single names, and during phases of volatility, the basis tend to open. For instance, iTraxx Main S15 was the on the run investment grade index when the sovereign crisis broke out. During the market moves that followed, the range of its basis was close to 1%, trading between -50cts and +50cts. Since, basis ranges have progressively gone down. On iTraxx Main S21, ie over the last couple of months, the basis has traded between +6cts and -15cts. The market might not be complacent yet, but it seems to price flawless action from the central banks.