Blog: The MOVE Index is not what it seems

The MOVE index is widely misunderstood. It's based on the implied volatility of a 20/20/40/20 combination of 2,5,10 and 30 year treasuries and then translated into basis points. But most still interpret it like the VIX. When the MOVE is high, it means bond risk is increasing. While if it is low, bond risk is decreasing. Not necessarily. That often is the correct interpretation.

But the MOVE can often go up during periods of crisis like March 2020 or October 2008 when stocks are down and bond prices are up (yields are down). What does that mean? If the MOVE is up and bond yields are down that means that many financial institutions are hoarding treasuries because they think their liquidity needs are rising. The depth of the treasury market decreases and so bid-ask spreads widen due to reduced liquidity. So if the MOVE is up and bond yields are down, watch out. It could be a sign of impending financial crisis. Bond risk is actually decreasing and it signals a flight to liquidity by financial institutions. This analysis is based upon work at the Fed and the ECB that's published but oddly ignored by most asset managers.

Right now yields are rising, so flight-to-liquidity is not happening.  But with the MOVE and VIX high combined with a high leverage reading from the Financial Instability Regime Indicator, markets are fragile.  As interest rates continue rising the odds of a Minsky Moment are increasing.