Three new rate buckets appeared west of 5.5% - which are representative of the steep decline in rates. On one hand, the absolute daily deviations are higher for the 5% bucket then for the 4% bucket, as illustrated by the blue line. This should be of no surprise because the rate's absolute volatility should eventually fall with lower rates - to prevent a plunge into negative territory. On the other hand, the overall actual volatility level recorded today is about as high as it has ever been historically - even when the 10-yr rate was 2-3 times higher than it is now. Our conclusion could be that the normal model can correctly describe the random process within a wide range of swap rate levels - except perhaps for very low ones.

ADCO volatility index >>>