How CPI Drives Interest Rate Volatility

Using historic yield curve moves of the BrokerTec 10-year mid yield 3 p.m.  close, the yield moves on the CPI release date and the subsequent one-week moves show dramatic market reactions. In general, as CPI was above 8%, interest-rate movements both one day and one week after release were significantly positive. Likewise, when CPI began to move lower into the 7% range, the interest rate movements were to the downside. However, the January CPI print came in higher than expectations and interest rates responded by moving higher, particularly over the next week as FOMC officials began to talk in more hawkish terms. Here is that same CPI chart with the change in 10-year BrokerTec benchmark rates for one day and one week.

Converting those interest rate movements and plotting them in a histogram provides more insight to what happened in the interest rate market over the past year. The one-day interest rate movement appears to look somewhat normally distributed with rates moving lower. However, the one-week change looks much more skewed to higher rates. In general, higher rates provide for a more volatile interest rate environment. Assessing the movement in interest rate volatility during and after CPI releases unlocks some additional interesting insights.

Assessing interest rate volatility can easily be done using  CME Group CVOL on 10-year yield volatility. This index tracks the 30-day implied volatility using the deep liquidity in treasury futures markets.

Using the same analysis for both one-day and one-week 10-year treasury movements via CVOL, a pattern becomes evident when plotted in a scatter chart.  Over the prior year the movement in initial volatility during the first day has a decent R-Squared with additional interest rate volatility movements over the following week.

Below is the one-day 10-year treasury CVOL movement plot against one-week CVOL movement. Notice how the direction of the CVOL index for the one-day and the one-week are often quite similar. A simple linear regression line has been included in the plot as well as the R-Square value of 0.5. While there is not yet enough data to be statistically significant and history does not guarantee the future, an interesting pattern has developed with the data that we have thus far.

With such an interesting environment, the ability to monitor changes in CPI and associated markets can help investors with additional risk management tools. Stay tuned over subsequent months as we track these insights.