Market-Structure Change to Spur Volatility


When volatility finally returns to the fixed income market, the participants will be able to attribute much of it to the growing momentum of electronic execution over the past five years.

Andrew Busch, CFTC

“We see these incredible short, sharp shocks to the system that gives you incredible volatility, said Andrew Busch, chief market intelligence officer at the Commodity Futures Trading Commission, during the WBR Fixed Income Leaders Summit in Boston. “Over the last five years, as we have digitalized the markets, things do not take long to unwind anymore. It happens quickly now.”

Busch did not offer this as his own view, but what the regulator has seen across many of the markets and other validations.

“Go back to February 5 and look at the VIX index and the way the market traded that day,” he said. “I would go back a week ago to Italian debt and what happened in that market and how violent that was.

Busch also attributed the expected volatility to the Federal Reserve’s plans to step back from its policy of suppressing yields through its quantitative easing program and suppressing volatility through that.

“If the Fed is raising interest rates and they are qualitatively tightening over time, you would expect volatility to pick up because they were doing one thing to suppress volatility, and now they are unwinding that,” said Busch.

At the same time, the US Department of the Treasury has been increasing its issuance to cover the 2017 tax break

“As that picks up steam, you have a lot more securities coming on the market looking for money, funding, and so on, which adds to the volatility that is in the marketplace,” he explained. “It is symptomatic of a market that is trying to adjust to the risk that is out there. It is a different market structure than we have had in the past.”

Busch noted that the recent unexpected comments from the European Central Bank regarding the planned ending of its quantitative easing policy in September, or at least its discussion of ending the policy and other political uncertainties created a nice mix for increased volatility.

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