Mike at HEDGEFolios.com is one of many out there who are wondering whether the VIX has outlived its usefulness, as the recent spate of single digit readings have sent many back to look for a better indicator. His suggestion: why not look at the volatility associated with the 10 Year Treasury Note instead of stocks?
Never one to let any untested idea stray too far from a spreadsheet, I examined the volatility of the 10 Year Note from 1990-2006 and learned that 2006 was the least volatile on record, with 2007 off to an even less volatile start. The correlation between the VIX and the 10 Year Note was .24 for the 17 year period, but jumped to .43 for the past decade and an impressive .99 for the last three years, as the chart below (with normalized values) demonstrates.
The current volatility of the 10 Year Note is still a fair distance from the historical lows of the summer of 1998, but as the VIX edges ever lower it is always a good idea to keep at least one eye on the long bonds.