{"id":1440783,"date":"2023-11-27T15:20:00","date_gmt":"2023-11-27T20:20:00","guid":{"rendered":"https:\/\/bugaluu.com\/news\/?p=1440783"},"modified":"2023-11-27T15:20:00","modified_gmt":"2023-11-27T20:20:00","slug":"vix-hits-cycle-lows-in-defiance-of-weak-fundamentals","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/vix-hits-cycle-lows-in-defiance-of-weak-fundamentals\/1440783\/","title":{"rendered":"VIX Hits Cycle Lows In Defiance Of Weak Fundamentals"},"content":{"rendered":"

VIX Hits Cycle Lows In Defiance Of Weak Fundamentals<\/span><\/p>\n

\n

Authored by Simon White, Bloomberg macro strategist,<\/em><\/p>\n

The VIX made its cycle lows last week, despite elevated cross-asset volatility and poor fundamentals in credit markets that would normally be consistent with a higher VIX.<\/strong><\/p>\n

The index made a new pandemic-era low last Friday, steepening the VIX futures curve. <\/strong><\/p>\n

The VXV (made up of options with an average expiry of three months) and the VIX1D (made of zero-day options) also both made new lows.<\/p>\n

Moreover, the VIX is low versus realized volatility and, shown in the top panel of the chart below, historically low versus cross-asset volatility<\/strong> (i.e. fixed-income and FX volatility).<\/p>\n

<\/a><\/p>\n

The VIX has been rising versus at-the-money volatility since 2022 (bottom panel in chart above).<\/p>\n

Put skew has been rising as downside protection becomes more expensive. <\/strong>But call skew has also risen, mainly due to investors\u2019 speculative trading, keeping the absolute value of the VIX low.<\/p>\n

Given that stocks have spent the better part of two years in a bear market, intuitively one might expect implied vol to be higher. But dealer hedging of positive-gamma positions, which represses realized and thus implied volatility, and low implied index correlation due to the largest stocks driving the majority of the S&P\u2019s returns have conspired to keep the VIX low.<\/p>\n

Nonetheless, underlying fundamentals suggest the VIX should be higher. <\/strong>The equity of a firm is a thin sliver of capital between its assets and liabilities. When a company\u2019s credit situation worsens, the equity must bear the burden of the adjustment, stoking its volatility.<\/p>\n

This is one of the reasons why there is such a close relationship between high-yield credit spreads and the VIX.<\/p>\n

Bankruptcy filings in the US (which lead formal Chapter 11 bankruptcies) are elevated and consistent with wider credit spreads. Thus they are also consistent with a higher VIX.<\/strong><\/p>\n

<\/a><\/p>\n

Bank credit has tightened, loan charge-off rates are rising, and more companies are defaulting on the their debt. <\/strong><\/p>\n

Underlying credit conditions are not being reflected in credit spreads or implied equity volatility. Both are subject to an abrupt repricing higher when they are.<\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nMon, 11\/27\/2023 – 10:20<\/span><\/p>\n

\u200bhttps:\/\/www.zerohedge.com\/markets\/vix-hits-cycle-lows-defiance-weak-fundamentals<\/a>\u00a0<\/p>\n

\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

VIX Hits Cycle Lows In Defiance Of Weak Fundamentals Authored by Simon White, Bloomberg macro strategist, The VIX made its cycle lows last week, despite…<\/p>\n","protected":false},"author":0,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1440783","post","type-post","status-publish","format-standard","hentry","category-news","wpcat-1-id"],"_links":{"self":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1440783","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/comments?post=1440783"}],"version-history":[{"count":0,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1440783\/revisions"}],"wp:attachment":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/media?parent=1440783"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/categories?post=1440783"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/tags?post=1440783"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}