Treasury yield implied volatility and real activity

We show that at-the-money implied volatility of options on futures of five-year Treasury notes (Treasury “yield implied volatility”) predicts both the growth rate and volatility of gross domestic product, as well as of other macroeconomic variables, like industrial production, consumption, and employment. This predictability is robust to controlling for the term spread, credit spread, stock returns, stock market implied volatility, and several other variables that prior literature showed to predict macroeconomic activity. Our results indicate that Treasury yield implied volatility is a useful forward-looking state variable to characterize risks and opportunities in the macro economy.