What's the MOVE Index and Why It Might Matter?

With all the data, earnings, and central bank news to track lately, it's been easy to forget about volatility. Those who do remember often turn to the Cboe Volatility Index^® (VIX), which tracks stock market uncertainty and can sometimes hint when the S&P 500^® index (SPX) might be on the cusp of a dramatic move.

While the VIX can help you prepare for stock market shifts—especially downward ones—the Merrill Lynch Option Volatility Estimate, commonly known as the MOVE Index (MOVE:GIF), tracks volatility in Treasuries to provide insight into the fixed income market and sometimes can even outpace the VIX as a red flag. Fixed income is the second largest market in the world behind currencies.  

Back in March 2023 when banking industry troubles percolated, the MOVE Index began climbing several days before corresponding moves in the VIX. Not long after that, U.S. stocks posted steep losses as the VIX catapulted higher, but investors who'd watched the MOVE Index might've had an early inkling something was wrong.

A similar scenario took place a year earlier when the MOVE started rising before the VIX as the Federal Reserve began hinting it would abandon its zero-interest-rate policy. Increased volatility often leads to downward moves on Wall Street, which can cause some traders to consider pulling back on equity exposure.

"If there's a lot of uncertainty in fixed income, it tends to bleed into the equity market too," said Joe Mazzola, head trading and derivatives strategist at Schwab. "A high MOVE Index signifies increased volatility in the Treasury market and possible heightened market uncertainty and risk."

The MOVE Index uses an options-pricing model based on a weighted average of option probabilities to reflect collective expectations for future volatility in the fixed income market. 

Diving deeper, the MOVE measures the implied yield volatility of a basket of one-month, over-the-counter options on 2-year, 5-year, 10-year, and 30-year Treasuries. It's sometimes called the "VIX for bonds," according to the Intercontinental Exchange (ICE).

You can track the MOVE Index on Schwab's thinkorswim^® platform by typing in the symbol MOVE:GIF. It's updated at the end of each trading day. The index has traded in a wide range recently, from below 50 in the spring of 2021 to nearly 200 in March 2023 when bank failures sent Treasury yields on a roller-coaster ride over a very short period. 

In the chart below, the MOVE Index (candlesticks) made a sharp ascent after the banking crisis and pulled the VIX (purple line) up with it. Then as rates stabilized and the MOVE receded, so did equity volatility.

The MOVE's 200-day moving average as of June 2024 was around 110. It's spent most of 2024 below 120 but topped that in April when yields rallied and stocks fell after bearish U.S. inflation data snuffed out hopes for first-half rate cuts.

A 50-day moving average (red line, lower chart) can more accurately show how closely the MOVE and the VIX are correlated. The moving average line fell to recent lows in late 2022 when interest rates dropped amid economic worries. But the moving average line jumped in March 2023 during the regional banking crisis that saw Treasury yields flare. The correlation tends to occur when stocks are more sensitive to potentially rising Treasury yields.

There have been many periods when the MOVE didn't live up to its name and stayed static, punctuated by several when it became extremely useful for traders trying to get a sense of bond market volatility. 

The long gap between rate hikes from near the end of the Great Recession in 2008 through late 2015 was one where the MOVE seldom gave investors much of a clue into market movements. That's because Fed policy was so historically dovish that investors simply didn't worry much about interest rates. In short, the MOVE hasn't been particularly helpful when Fed interest rate policy is relatively stable with rates high or low. Range-bound rates tend to keep Treasury market volatility under control, leaving the MOVE relatively steady.

But when cracks appear in rate stability or the market senses other developments, such as banking industry difficulties that can impact Treasury yields, the MOVE may show signs of this increased volatility. This may indicate to investors just how much drama they might expect in the Treasury market as a rate change era looms. And that often shows up on the MOVE before it does on the VIX.

"MOVE hasn't always led, but when there are periods of uncertainty or heightened bond volatility, that's when we've noticed it's had a corrective effect on the equity market," Mazzola said. 

For instance, the MOVE rose going into October 2023, followed by a pullback in equities.

One way to track the MOVE is to look at it not in isolation but in its relationship to the VIX. When the MOVE/VIX band is highly correlated, the MOVE can provide more clarity into possible stock market direction.

"Once we saw the Fed would raise rates in early 2022, the volatility band between the MOVE and the VIX widened, and the MOVE became a real leading indicator of where volatility might go," Mazzola explained.

Keep in mind, there's often a correlation between fixed income and equity markets, and this is picked up by the level of correlation between the VIX and the MOVE. When Treasury yields rise, that can often, but not always, lead to lower stock market values. The correlation tends to occur when stocks are more sensitive to potentially rising Treasury yields. That was the case, for instance, in early 2022 when the stock market was at record highs following a long stretch of zero interest rates that sent money flooding into Wall Street.

By mid-2024, the MOVE/VIX relationship was less correlated in part because there seems to be a clearer picture of the rate path ahead and the stock market's moves have begun to uncouple with rate changes. In other words, stocks are becoming less rate sensitive. 

"You can use the MOVE Index to identify heightened volatility in the bond market and extrapolate whether that will lead into equity market volatility," Mazzola said. "At peak, the correlation with the VIX is 60 to 70. I wouldn't say it's a perfect indicator. But when it maxes to 60 to 70 between the VIX and the MOVE, that tells me it's a decent indicator. You can't look at it as a perfect fit. It needs to be seen as a tool in context with what's happening around you."

The MOVE Index may presage volatility in the equity market given certain market conditions. Traders and investors should always keep an eye on the potential for market volatility because a sudden rise in volatility can imply rocky markets and wider daily price swings ahead.