Record lows for an indicator of U.S. bond volatility show investors may be overly confident in the Federal Reserve’s ability to prop up the market, according to Michael Shaoul, Marketfield Asset Management LLC’s chief executive officer.
The CHART OF THE DAY displays monthly readings for this gauge, the Bank of America Merrill Lynch MOVE Index, during the past 25 years. The index is derived from prices paid for options on Treasury notes and bonds.
Last month, the MOVE fell below 50 for the first time. A record low of 49.04 was set on May 1 -- and tied two days later, even as Treasuries declined in response to April job growth that exceeded economists’ forecasts.
Investors are demonstrating the kind of faith in Fed Chairman Ben S. Bernanke and his central-bank colleagues that they had during the 1990s under his predecessor, Alan Greenspan, Shaoul wrote yesterday in an e-mailed note to clients of his New York-based firm. The Fed is currently buying $85 billion of debt each month under a policy of so-called quantitative easing.
“We ourselves take less comfort from the current state of affairs,” he wrote. “The stubborn belief that exists in the bond market” is at odds with its returns this year by comparison with stocks, the note said.
Bonds had a 0.6 percent total return -- price changes and interest payments -- for the year through last week, according to the Barclays U.S. Aggregate Bond Index. As for stocks, the Standard & Poor’s 500 Index returned about 14 percent after accounting for dividends.