Citigroup has added a lookalike fear gauge to its investor toolbox, offering a credit equivalent of Chicago Board Options Exchange's VIX volatility index. This is intended to provide an accurate metric for risk aversion in the credit asset class.
It's too quiet
The original fell to its lowest level in 23 years last week, perplexing many industry professionals. If this were a western, John Wayne would be looking over the ramparts of a cavalry fort saying 'I don't like it, it's too quiet,' said one veteran.
“Does the lack of fear reflect an exhausted tired market that believes zero volatility is normal, or is it an example of enormous complacency?” said Bill Blain, head of alternative assets at Mint Partners in London.
Reuters explains that Citi's "credit VIX" mirrors the CBOE's VIX methodology, using a weighted average of option prices on credit default swap indices across a range of strikes.
The new index tracks implied volatility across investment-grade and high-yield credit default swap indices in the US and Europe. It was developed in response to rising interest in the VIX as it plummetted.
Aritra Banerjee, a credit analyst at Citigroup, is widely quoted as saying that Citi thinks its new gauge captures a lot more information contained within option markets.
This allows it to serve as a more accurate metric for broad risk aversion, and Citi thinks investors should track it. He was invited to comment on the remarks attributed to him but declined to make himself available.
Following in JP Morgan Chase footsteps
One other major bank has gone down this route before. JP Morgan Chase filed a trademark application on 16 October 2016 for the name VTRAC-X. It says the goods and services involved relate to providing financial data on benchmarks for market volatility.
Earlier that month, on 15 October, VTRAC-X was presented to the world as the new family of JP Morgan volatility trackers for the global suite of CDS indices. VTRAC-X reflects the market’s expectation of future volatility.
It plays the analogous role of VIX and VSTOXX for credit markets; a single level that reflects all quoted CDS option prices.
VTRAC-X represents a transparent, model-independent tracker of expected credit volatility and its term structure, said JP Morgan at the time. “We expect VTRAC-X to become a market standard and a variety of future products to be developed on the back of it.