What Happened to Long Dated Equity Vol, Anyways?

The recent crush in long-dated US equity Vol looks more like something we've seen after major liquidity injections (QEs, LTRO, COVID stimulus) ->

But the Fed is technically still tightening...

IV of ATM SPX Option w/1-yr to Maturity

Long dated US equity Vol pricing in the most "optimism" around Fed pivot narrative...

Recent crush in longer-dated SPX volatility is similar to what we've seen historically after major CB liquidity injections (QEs 1 & 2, LTRO) & COVID fiscal stimulus

~ and has far outpaced typical beta to underlying SPX rallies...

Betas of daily changes in SPX 50-D IVOL vs. SPX daily returns

Collapse in long-dated SPX IV has coincided w/the peak in 2Y yields & rates VOL & has tracked the market's expectations around Fed policy shifting from hikes/pause to -> rate cuts

SPX 1Y ATM IV vs 2Y TSY yields & TLT 1Y IV

SPX 1Y ATM IV vs rates market's pricing of Fed hikes/cuts in next 3-18m

Is this overdone?

What happens when the market begins to price out some of these rate cuts, as we saw with Friday's massive NFP beat?

Dec23 SOFR Contract (CME), post-NFP

Has the market overshot the data?

Given the seemingly minor shift in sentiment around *consensus* for rate cuts into EOY, it seems prudent to exercise caution selling VOL at these levels.

We recommend owning Feb put spreads circa 4000 top strike for upcoming CPI (ie, Feb 3800 4000 Put Spread) or Mar/Apr ~5 delta Puts as positioning favors a VIX spike should the market experience a meaningful pullback from these levels (4150-4175 ES)