Friday, October 26, 2007

Treasury Note Volatility



This chart shows the absolute change in the ten year treasury note from one trading day to the next.

Investors seem very unsure of the 10 year rate picture. I certainly am (especially since I'm worried about inflation). Note that interest rates in the early 1960s were roughly the same as they are right now. However, the volatility in the 10 year interest rates is much higher these days than back then.

That high point in the volatility in 1987 coincides with the stock market crash. Here's 1987's 10 year treasury yields. It is fairly obvious why the stock market would crash under the following circumstances. Ouch.



Needless to say, I'm not exactly expecting a 1987 style crash in the morning. On the other hand, if/when we do someday get a crash I'm not expecting a 1987 style recovery after it either though.



Here's a closer look at the past few years.



Here's a look at 2007.

See Also:
Treasury Bill Volatility
Treasury Bill Volatility v.2
10 Year Treasury Yield v.2

Source Data:
Federal Reserve: Selected Interest Rates

3 comments:

  1. Most interesting....

    Cheers!

    ReplyDelete
  2. nades,

    I'm glad you find the charts interesting. :)

    For what it is worth, late last night I found a slightly improved way to calculate/estimate volatility.

    I was using ((today's price) / (yesterday's price) - 1) and showing the result as a percent (sometimes just the absolute value of the result depending on the chart).

    That has an unwanted side effect since a 10% drop followed by a 10% gain doesn't get you back to where you started (i.e., 0.9 x 1.1 doesn't equal 1).

    In future charts I'll be using (today's price - yesterday's price) / (the average of today's price and yesterday's price). It corrects that problem.

    There's a LOT of debate on how best to calculate volatility but I'm going to stick to simple back of envelope type calculations personally, if only so that I can understand what I'm seeing in the charts (and everyone else can too hopefully), especially since I'm most interested/curious about those daily "fear" spikes.

    http://www.numa.com/ref/volatili.htm

    In any event, I've updated all the formulas but the change is so minor (in most cases) that I don't think it is worth posting the new charts just for that.

    ReplyDelete
  3. One more thought.

    I said I wasn't expecting a 1987 style crash in the morning. That sure was an understatement. Good grief. The Nasdaq was up 2% today.

    It was just dumb luck. It wasn't like I was predicting anything, nor did I make a single penny off the non-crash, lol.

    ReplyDelete