What Explosion in Bond Volume Means

05/30/2013 8:00 am EST

Focus: OPTIONS

Mark Sebastian

Founder, Option Pit LLC

There has been a huge increase in trading volume in the bond market, and traders should pay attention, writes Mark Sebastian of OptionPit.com.

Traders used to seeing S&P 500 futures and Eurodollars as the most active futures on the CME GROUP will notice that over the last week volume on the five-year, 10-year, and 30-year have exploded. Since the Fed opened its mouth the flood gates have opened. For the second time in five years, the 10-year note traded over two million contracts, the five-year almost traded two million contracts and the two- and 30-year each traded near a million contracts. This is an explosion in volume that should not be ignored by the average trader. Take a look:

chart
Graph from TD Ameritrade
Click to Enlarge

While traders might be surprised by this type of volume, it could be that a sleeping giant has awakened. I have been listening to bond traders lament the lack of movement and volatility in the bond market since the Fed began QE. Traders might notice the noticeable increase in TLT vol over the last few days.

chart
LivevolX www.livevol.com
Click to Enlarge

Remember, the VIX slept for five years from 2002-2007 then exploded. We could see something similar in the bond market. That would also cause the VIX to increase (although it might not hit 80 like everyone is expecting).

The Trade
Bond vol is high, we think it does not make sense to go short until we see someone really step in. It might make sense though to execute a tightly defined spread in TLT.

Disclosure: We have are short VIX in the Option Pit Strategy Letter.

By Mark Sebastian, Blogger and Contributor, OptionPit.com

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