Treasury Yield Curve ETNs and Volatility (FLAT, STPP, VXZ, VXX, SPY)

The subject of the VIX and Treasury yields is one I have probably not explored in sufficient detail in this space, so with some recent developments, this seems like a good time to dive into that subject.

One big reason for my interest is the recent rapid steepening of the Treasury yield curve. Another is an excellent article on two yield curve ETN plays from Timothy Strauts of Morningstar: How to Take Advantage of a Steep Yield Curve. In the article, Strauts discusses two ETNs from iPath that are designed to take advantage of a yield curve that becomes steeper or flatter. The ETNs are known formally as the iPath US Treasury Steepener ETN (NYSE:STPP) and the iPath US Treasury Flattener ETN (NYSE:FLAT). These innovative and exciting ETNs hold 2-year and 10-year Treasury futures and are rebalanced monthly. In many respects they represent the latest generation of what I refer to as strategy-in-a-box ETPs.

Launched in August, STPP and FLAT have started to attract some attention in the last few weeks, as Treasury yields have become more volatile.

There is not yet much of a track record, but I will be interested to see how the movements in STPP and FLAT interact with movements in the VIX. For an initial pass, I have chosen to look at STPP and FLAT in conjunction with the SPDR S&P 500 ETF (NYSE:SPY) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSE:VXZ). (Note that I chose VXZ here in order to sidestep the strong contango in the VIX futures term structure that exacerbated the price decline in the iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) as of late.)

The chart below shows the performance of the yield curve ETNs since their August 10th launch. Note that so far – and particularly as of late – it has been FLAT which has been more positively correlated with changes in implied volatility expectations as measured by VXZ. On the flip side, STPP has demonstrated a higher positive correlation with stocks, at least as reflected in SPY.

Going forward, I will provide periodic updates on my observations between changes in the Treasury yield curve in the VIX and also take up the subject of how the Treasury yield curve might be able to predict the future of the VIX.

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Written By Bill Luby From The VIX and More    Disclosure(s): short VXX at time of writing

Bill is a private investor who also authors the VIX and More ( blog and an investment newsletter from just north of San Francisco. His research and trading interests focus on volatility, market sentiment, technical analysis, and ETFs. Prior to becoming a full-time investor, Bill was a business strategy consultant for two decades and advised clients across a broad range of industries on issues such as strategy formulation, strategy implementation, and metrics. When not trading or blogging, he can often be found running, hiking, and kayaking in Northern California. Bill has a BA from Stanford University and an MBA from Carnegie-Mellon University.

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