Monday, March 17, 2008

Expanding on the VIX and the 10 Year Treasury Note Yield

On Friday, in Fear and the Flight to Safety, I posted a chart of the ratio of the VIX to the 10 year Treasury Note yield. That post triggered a number of interesting responses, two of which I would like to highlight here.

First, Jason Goepfert of, noted in a article titled Cashing in on the Panic that past instances in which volatility spiked to extreme levels relative to the 10 Year Treasury Note offered superb buying opportunities. Goepfert examined returns from five days to three months from the spike and found “results going forward were exceptionally positive and consistently so.” See his table of results for additional details.

Second, Tom Drake of Putting the Pieces Together suggested an obvious enhancement to the ratio chart: substituting the 3 month Treasury Bill yield for the 10 Year Treasury Note, on the grounds that the flight to safety usually favors short-term government debt. A monthly chart of the VIX to 3 month T-bill yield ratio (VIX:IRX), which is similar in many respects to Friday’s chart, is as follows:


Unknown said...

SPX e-minis have climbed all morning from over 30 down in the pre-market... and the cash VIX, up over 4 points this morning are now down a smidge (effectively unchanged from Friday). I may still be whacked hard today, but it seems there were bargain hunters buying today.

The biggest bargain hunter of all may be JPM, which is up over 10% thus far today, on its deal to buy BSC for $2... perhaps the wine of the day should be 'two-buck Chuck' in honor of that, Bill? lol

And why shouldn't JPM be up?! We, the taxpapers, are assuming much if not all of the risk (if I understand JPM's deal with the Fed), so I see this as effectively a transfer of wealth from BSC longs to JPM longs.

Interestingly, Jim Cramer doesn't seem to be impressed as I by the Fed's moves... read his post today on BloggingStocks and he wants more action. I have to take note of it, as I never thought he'd be so gloomy.

Hmmmm... rally seems to be failing since I started writing this. XLF was rallying earlier after gapping down on the open, but it seems to be taking the e-minis down with it. Not really the reaction I would have expected after the Fed opened up its discount window to Wall St.... if banks don't want to lend to the investment banks, the Fed is willing to be a source of liquidity. Shouldn't that be a good thing? ;-)

Perusing the list of the components of the XLF, the bottom of the list (in terms of the index weight) looks like a roll call of the financial companies that have been in the news (in a BAD way): MBI, ABK, ETFC, CFC, and now, BSC. Topping the list are two companies picking up some of these broken pieces... that is, BAC and JPM. Wealth transfer, again.


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