Bond risk

MacroVar monitors bond risk by monitoring the Move index dynamics. Bond risk is one of the components of MacroVar Risk Management model. Learn more about how MacroVar risk management model monitors bond risk.


Bond risk model

The bond market is the largest financial market in the world. Hence, it is very crucial to monitor the bond market's signals for future financial conditions. Bonds' greater risk is inflation risk. When an investor buys a bond, they commit to receiving a fixed rate of return for the duration of the bond as long as it is held. When inflation rises significantly, investors purchasing power erodes, and they may end up achieving a negative rate of return after factoring inflation. For example if an investor earns a 4% rate of return on a bond, but inflation rate is 6% then the investor's real rate of return is -2%.

MacroVar monitors bond risk, by modeling the MOVE index. the MOVE index is a well-recognized measure of US interest rate volatility that tracks the movement of the U.S. treasury yield volatility implied by current prices of one-month over-the-counter options on the two-year, five-year, ten-year and thirty-year treasuries.

MacroVar calculates the five year z-score of the MOVE index. Extreme positive values of the z-score greater than 2 indicate elevated bond implied volatility and rising financial risk conditions and vice-versa.