As discussed earlier, the VIX (implied volatility index) futures curve has become extremely steep.
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| VIX futures curve |
In fact the slope of the VIX futures curves has hit a historical record last week. The 7th nearby futures contract (UX7) is now almost 13 vol points higher than spot (VIX). The reason for using the 7th contract is that it takes us just over 6 months out - the 6th nearby contract yields the same result. The chart below shows the difference between the two since 2005. The record low of just below -40 was reached during the 08 crisis when the nearby implied volatility was bid up so much, the curve was at a record inversion (negatively sloping).
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| UX7 - VIX |
Where as in 2008 and in 2011 the highly inverted curve indicated an immediate threat to the markets, the current steepness is implying risks further out in time. The market is not buying the sustainability of the current equity rally and is pricing in risks of a material correction later on. This is consistent with other indicators such as the cyclicals underperformance. The record steepness points to the fact that central banks have been successful in suppressing current volatility, but the market is fully expecting it to show up again a few months down the road.
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