Rise in Middle of VIX Curve Shows Traders See a Long Bear Market

(Bloomberg) -- The breakneck speed of the equity rout is its most terrifying feature. Now, volatility markets show that fears are shifting to how long the frenzied trading will last.

The VIX futures curve now resembles conditions that prevailed during the worst of the 2008 and 2011 market downturns, periods of persistently elevated swings in the S&P 500 Index.

VIX futures are tied to the Cboe Volatility Index, which tracks the 30-day implied volatility of the benchmark U.S. equity futures via out-of-the-money options prices.

The front of the VIX futures curve -- the April contract -- has risen furiously as markets cratered. That’s to be expected. But what’s different this time is how much longer-dated contracts are joining in on the move even though Wednesday’s selloff isn’t the most severe of this nascent bear market. This is a signal that investors are bracing for a prolonged stretch of massive price swings.

The June, July, and August 2020 VIX futures -- the middle of the VIX futures curve -- are putting in their biggest one-day increases in the history of those contracts as of 1:57 p.m. New York Time.

“Owning that vol outside the front end might be more consistent with the current risk profile,” said Stuart Kaiser, head of equity derivatives research at UBS Securities LLC. “I don’t want to call it a value argument, but this kind of story will make sense to a lot of investors.”

Rises in the longer-term VIX futures may reflect crossover interest from credit investors using the equity volatility complex as an imperfect hedge for their relatively illiquid holdings.

Benn Eifert, chief investment officer at QVR Advisors, says that the middle and back portions of the VIX curve remain susceptible to continued buying interest as the market rout drags on.

“Vols keep going up, but are too low in the back,” he said. “Banks are already working on pitching longer-term S&P 500 volatility as a proxy hedge to credit clients.”

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