Derivatives Market Overview
July 2026
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Funding Markets
U.S. equity funding term structure largely reverted to a more upward-sloping curve as short-dated funding levels normalized after the quarter-end financing squeeze in June. While levels came down from year-to-date highs, they were still elevated relative to historical pricing and closed the month 12 bps above the two-year median. Fixed income financing was unchanged month-over-month and continues to trade below the two-year medians.
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., August 2026) with the intent to take 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
The 30-year U.S. Treasury yield moved higher throughout July, trading with a five-handle for much of the month before extending its move following the FOMC meeting and press conference, ultimately closing +32 bps month-over-month. Swaption implied volatility rose in tandem, with 1Mx30Y implied volatility recording the largest one-month increase over the trailing year, gaining ~14 bps. The MOVE Index posted an 11-bp increase, demonstrating the move higher in implied volatility was broad-based across the swaption complex. Notably, the increases in implied volatility were more prominent at the long end: 1Mx2Y increased 4 bps, 1Mx10Y increased 12 bps, and 1Mx30Y increased 14 bps.
Hyperscalers’ rapidly expanding capital expenditure programs have been financed by a surge in bond issuance. The increase in supply, and thereby leverage, has driven a material widening of credit spreads, as measured by option-adjusted spreads (OAS). Concurrent with this, demand for credit protection has notably increased. The chart below illustrates the OAS of generic Oracle 5-year senior unsecured debt against its 5-year senior CDS spread. Historically, Oracle CDS has traded inside the cash bond (negative CDS-cash basis), meaning a protection seller earned a lower spread through CDS than through the cash instrument. That relationship has since inverted; the basis has turned positive, and selling protection via CDS now offers a higher spread than the equivalent cash bond OAS. The shift to a CDS-cash basis demonstrates that the market is actively paying up for downside protection, a meaningful regime change.
What Stands Out
U.S. single stock implied volatility diverged materially from SPX implied volatility, with the VIXEQ/VIX spread reaching 34.14 in July, a 10-year high. The VIXEQ (CBOE S&P 500 Constituent Volatility Index) measures the market-cap-weighted 30-day implied volatility of S&P 500 constituent stocks, derived from single-stock options, while the VIX is calculated using S&P 500 index options. The spread is effectively a proxy for implied correlation; the only way index volatility can remain relatively low while single stock implied volatility is high is when there is low correlation among the index constituents. To illustrate the point, if an equal-weighted index consisted of two assets, and one went down 10% while the other went up 10%, the index return is 0%. When single stock volatility is elevated relative to index volatility, the market is pricing in greater dispersion of future returns across constituents.
The scatterplot below illustrates that over the trailing 10-year period, this divergence has never been wider at the current level of VIX. Single stock implied volatility reached the 98th percentile on a 10-year lookback, while the VIX remained in only the 40th percentile. Implied correlation has generally trended lower since March, reaching a year-to-date low in July. Realized correlation has followed suit and while earnings season typically depresses realized correlation as stocks respond to company-specific catalysts, the absolute level was exceptional: realized correlation reached the 0.1st percentile on a 10-year lookback. While this low correlation regime could persist, a sudden macro shock could drive correlations sharply higher, as seen during the Iran conflict in March.
[1] Please refer to the glossary for more information.
Data as of July 31, 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.
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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