May 12, 2015 (Bloomberg) -- Volatility in 10-year Treasury yields is surging at a pace not seen since the Oct. 15 flash crash as traders exit bets that interest rates would remain low.
Normalized volatility on three-month options for 10-year U.S. interest-rate swaps, known as 3m10y swaptions, rose as much as 7 percent Tuesday as U.S. government-debt yields surged amid a rout in fixed-income securities that began last week in Europe. The gauge of volatility on swap rates mirrors movements in options on Treasury futures, where Monday night saw large trading on the CME Group Inc. exchange in contracts that profit if note prices slide.
“We’ve seen huge volatility shifts that started in Europe last week and have translated into huge volatility shifts over here,” said Todd Colvin, a senior vice president at Chicago-based Ambrosino Brothers. “This is a pure position shift.”
The rise in swaption volatility is the largest since it rose more than 20 percent on Oct. 15, as 10-year Treasury yields plunged 0.34 percentage point, the most in five years. The global selloff in bonds that began last week is intensifying after lifting U.S. yields to the highest level this year and driving Germany’s 10-year yield 14 times higher in less than a month. Benchmark Treasury 10-year yields rose one basis point, or 0.01 percentage point, to 2.29 percent as of 10:30 a.m. New York time, and touched the highest since Nov. 14.
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