Derivatives Market Overview
May 2026
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Funding Markets
Equity index financing costs increased month-over-month on the continued rally, while fixed income financing levels were flat or lower in the one-year tenor. One-year funding levels in equities trended toward the median of the prior two years and MSCI ACWI closed the month above its median. Fixed income markets remained below their two-year median. The U.S. equity funding term structure flattened in May, driven by moves higher in the near-dated tenors.
Cash-and-carry strategies seek to earn a positive financing spread after adjusting for carrying costs. The strategy buys a near-dated futures contract (e.g., June 2026) with the intent of taking delivery of the physical asset and sells a far-dated futures contract. The financing levels in the table account for the storage costs associated with taking physical delivery of gold.
Volatility Markets
While the S&P 500 (SPX) ATM implied volatility declined over the month, the iShares MSCI Emerging Markets ETF (EEM) 3-month ATM implied volatility rose by more than 8 volatility points on a positive 7.2% return in May. The divergence in implied volatility of the two assets widened considerably since the start of the year and currently sits at the 100th percentile on a one-year lookback. EEM seeks to track an index composed of large and mid-cap equities from 24 emerging-market countries. Notably, the fund has developed a meaningful tilt toward the information technology sector, with its top three holdings (Taiwan Semiconductor, Samsung and SK Hynix) collectively representing nearly 30% of the index. The AI-driven concentration in EEM’s top holdings increasingly ties emerging market volatility to the same technology themes dominating U.S. equity markets.
The Nasdaq-100 Index (NDX) extended its rally, posting a 27.8% two-month return, as continued enthusiasm surrounding the artificial intelligence (AI) theme sustained the upward momentum. The NDX volatility surface shifted higher across 95% to 115% strikes, flattening the skew. The three-month 90%/110% skew differential reached a one-year low in May, closing the month at the 0.8th percentile. The mechanics driving the flattening were primarily attributable to the increase in implied volatility across upside strikes, reflecting investor demand for upside exposure.
What Stands Out
Corporate AI spend, elevated energy prices and a higher-than-expected CPI print collectively contributed to a shift in the prevailing narrative surrounding U.S. interest rates. The 10-year U.S. Treasury yield rose to 4.68% and the 30-year hit 5.18% in May, its highest level since 2007, before retracing to close the month unchanged. The magnitude of the intra-month moves was emblematic of the growing uncertainty around the future path of U.S. interest rates.
Swaption markets echoed this shift in sentiment with the implied probability distribution for the 10-year swap rate shifting to the right relative to the end of February, implying a higher probability of higher rates one year from now. Furthermore, when centering the implied distribution around changes in the forward rate, the May curve exhibits slightly more positive skew with the market assigning a higher probability to upside rate outcomes driven by elevated OTM payer swaption implied volatility. The moves in underlying rates and swaption prices suggest the market is increasingly positioning for a higher interest rate environment.
[1] Please refer to the glossary for more information.
Data as of May 29, 2026. Sources: Bloomberg Index Services Ltd., Bloomberg, iVolatility, dealer indications, NISA calculations.
Glossary
What is the MOVE Index? The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps. The index tracks implied normal yield volatility of a yield curve weighted basket of at-the-money one-month options on the 2Y, 5Y, 10Y and 30Y constant maturity interest rate swaps. The index value is equal to the average of the implied normal yield volatility of the four options, where the 10Y option is given a 40% weight and the other components each hold a 20% weight.
What is the VIX Index? The VIX Index is a calculation designed to produce a measure of constant 30-day expected volatility of the U.S. stock market derived from mid-quote prices of the S&P500 Index call and put options.
What is a 1Mx10Y USD Swaption? A swaption is the option to enter into an interest rate swap. The 1Mx10Y USD Swaption is a one-month option giving the purchaser the right to enter into a 10-year interest rate swap.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data are as of the dates noted.
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