Traders bid up the price of portfolio insurance today, pushing the VIX above 20 for the first time since October’s market sell-off. ETF’s that short the front end of the VIX futures curve saw their shares drop violently as traders aggressively bid up the price of protection:
Stock markets started off the day in a positive mood, with the S&P 500 Futures up around 28 handles. But late in the day a low volume sell-off accelerated into a full fledged panic as stocks gave back all their earlier gains:
Bonds whip-sawed higher on the day; the long end of the US Treasury curve saw flows from investors seeking safety from declines in high yield bonds and equities. The 30-year saw a strong bond auction with a yield of 2.83%. Yields on government bonds continue to collapse as deflationary expectations become reality.
Traders are fearful of a 1987-style sudden break in equity/bond prices. Today they bought a lot of fire insurance for their portfolios, both directly via volatility products and indirectly via government bonds.