Markets Edition: VAR – Volatility Also Rises

PodcastResearch @ CitiAdam PickettOct 6

Pickett argues that Treasury volatility, rather than the level of 10-year yields, may be the more important risk for equities, with auction-week bond weakness adding to concerns about a Treasury buyer strike. The discussion also points to vulnerable OAT spreads in France and diesel exposure across several countries. Separately, speakers discuss how volatility may ease after an initial Fed hike, while front-end rates could remain exposed to repricing and the team expects a November Bank of England hike but remains positive on equities.

Market Volatility Fixed Income Interest Rates

Preview · 5 more points in the app

Read the Full Summary

Key Takeaways

Pickett argues that Treasury volatility measured by MOVE is more relevant to equity risk than the level of 10-year yields, and says the elevated MOVE and unusually weak Treasury performance during 2026 auction weeks raise the risk that equities will feel rates more acutely. Separately, the speaker warns that rising fixed-income volatility could pressure risky assets, though such volatility spikes tend to be short-lived.

Pickett says MOVE tends to rise around the first Fed hike and then ease as markets understand the intended hiking cycle and pace; the speaker likewise says volatility spikes tend to come down after the first hike. Both descriptions frame the increase as potentially temporary, not a lasting pattern.

The guest says CPI at the start of a hiking cycle is important for judging how far rates may rise, and that in cycles with at least 100 basis points of hikes, market rates very rarely peak at the front end before the first hike. The speaker’s view that a selloff is unlikely to be over before the first hike points to continued repricing risk ahead of that initial move.

MARKETS

MOVE And Equities — Pickett argues that 10-year Treasury yields are less predictive of equity behavior than Treasury volatility, as measured by MOVE. He says MOVE has risen recently, increasing the risk that rates will eventually affect equities.

“The level of the move index, meaning the volatility of the treasuries, is much more predictive…”—

Auction Volatility — Pickett says Treasury auction weeks in 2026 have seen meaningfully worse bond performance than non-auction weeks, more so than in previous years. He says it is unclear what would break a Treasury buyer strike. Volatility driven more by a buyer strike than by the Fed cycle, he adds, raises risks for equities.

“For example, if you look just in 2,026, auction weeks have meaningfully worse performance for bonds than non auction weeks, and that is much more the case than it used…”—

FORECASTS

MOVE Cycle — Pickett says MOVE tends to rise around the first Fed hike, sometimes slightly afterward. It then comes down as markets better understand the Fed's intended hiking cycle and pace.

“Now the good news is that these move spikes tend to be quite short lived. And we also found a pattern where they…”—

Front-End Repricing — The guest says CPI at the start of hiking cycles is a key variable in gauging how far rates may rise. In the guest's study, market rates very rarely peaked at the front end before the first hike in cycles involving at least 100 basis points of hikes. That suggests front-end rates may remain vulnerable to repricing before those cycles begin.

“And if you just look at the sort of CPIs at the start of hiking cycles, it is probably the single most important variable to look at to figure out…”—

Volatility And Equities — The speaker warns that rising fixed-income volatility could make equities and other risky assets take rising rates more seriously. He adds that volatility spikes tend to be short-lived and recede after the first hike.

“Great…”—

Treasury Volatility Risk

Pickett says Treasury volatility matters more to equities than the 10-year yield level, with auction-week weakness raising buyer-strike concerns even as valuation and sector declines have absorbed some pressure.

EMFX Carry And Diesel

The team exited EMFX carry as cross-asset volatility rose above its risk threshold and flags diesel-sensitive economies, including Mexico and Brazil, as vulnerable to commodity-driven rate moves.

France OAT Spread Risks

Pickett sees French fiscal constraints, ECB tightening, and energy costs as a damaging mix for OAT spreads, while slower ECB hikes and lower energy prices could ease pressure.

Front-End Rate Repricing

The speakers say front-end rates may remain exposed before the first hike, expect a November Bank of England hike without consecutive moves, and stay positive on equities despite volatility risks.