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Notable trends and dislocations (US) Major US equity indices soar to all-time highs as the low vol regime persists Friday marked the end of the second full week following the political turmoil on Wed, 17-May. Since then, volatility has once again collapsed (10d realized is at 4.6%) and the S&P 500 term structure of volatility has steepened with the 3m-1m spread trading in the 90" 2y %-ile. Low S&P 500 short-dated vols pushed down the back end of the curve (ly and beyond), while Russell 2000 1y+ vols remained bid (Chart 19}. Last week, the VIX printed 2 of its 15 closes below 10 since 1990 (Chart 20). Vol-of-vol remained supported with the VVIX/VIX ratio setting yet another record (8.58) on Friday. All of this happened as SPX, NDX and INDU finished the week at all-time highs. Chart 19: In the trading sessions following the political turmoil and ensuing volatility spike on 17-May, long-term vols (ly and above) reset lower for SPX but remained bid for RTY 20% 419% 20% 16% 15% 14% ; _ 10% 10% 5% 8% 0% 6% 4% -5% 1m 3m 6m ly 1.5y 2y RTY change (RHS) SPX change (RHS) SPX 17-May === SPX 1-Jun RTY 17-May =——_RTY 1-Jun Source: BofA Merrill Lynch Global Research. Chart 20: 2017 is already the 5" calmest year for the VIX with 76 YTD closes below 12. Despite the short-lived vol spike on 17-May, the VIX had a very calm month of May, extending into June as it printed 6 out of its 15 historic closes below 10 45 ™N . 140 a8 317 35 100 30 an 3 80 25 = 60 2 = 40 0 a2 E 20 =z 0 ‘06 ‘95 ‘93 '05 ‘17 ‘94 ‘14 ‘07 16 '92 ‘04 13 ‘15 YTD == >= Average VIX level (RHS) —)=Max VIX level (RHS) Source: BofA Merrill Lynch Global Research, Bloomberg. Daily data from Jan-90 to 5-Jun-17. The political turmoil on 17-May caused short-term vols to reset higher and the VIX jumped to 15.59 from 10.65 the prior day. Short-term vols in turn moved the back end of the curve higher with e.g. SPX (RTY) 1y vols trading higher by 1.05% (0.79%). However, the agitation in equity markets was short-lived. The front end of the curve collapsed over the subsequent trading sessions and resulted in a very steep term structure for both indices, similar to what we have become accustomed to over the prior months. By the end of last week, SPX long term vols (1y and beyond) had moved to virtually the same levels where they traded prior to the vol spike. RTY long-term vols, however, remain bid. With only five months of the year behind us, the VIX has already closed below 12 on 76 days. Since 1990, only 4 other years have seen a larger number of trading sessions with the VIX closing below 12. Of the 15 trading sessions in VIX’s history since 1990 when the index closed below 10, 6 were between May-17 and Jun-17. The low short-dated implied vol is in part driven by realized vol; 10d is at 4.5%, which is already subdued even for the current low- vol regime (17th %-ile since the US election last November). Bankof America Merrill Lynch Global Equity Volatility Insights | O06 June 2017 9 HOUSE_OVERSIGHT_023583