Volatility-linked ETFs crashed to fresh record lows Thursday and stocks soared after European Central Bank President Mario Draghi outlined a new program to buy bonds to support debt markets.
The CBOE Volatility Index, known as the VIX and Wall Street’s fear gauge, dropped about 7%.
The ECB kept rates unchanged Thursday. [Euro ETF Steady After Rates Unchanged; Bond-Buying Plan in View]
“As we said a month ago, we need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area,” Draghi said in prepared remarks Thursday.
The central bank will undertake “outright monetary transactions” in secondary markets for sovereign bonds in the Eurozone, he said.
The transactions “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi added. “Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”
In currency markets, CurrencyShares Euro Trust (FXE) was down a modest 0.1%.
In U.S. stocks, the Dow rallied nearly 190 points in morning trade.
Exchange traded products designed to track VIX futures contracts have been crushed this year on falling volatility and “contango” in VIX futures.
For example, VXX was down 69% year to date heading into Thursday’s action, according to Morningstar. [Double Whammy for Volatility ETFs: Falling VIX and Contango]
iPath S&P 500 VIX Short Term Futures
Full disclosure: Tom Lydon’s clients own TVIX.
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