Treasury Volatility Falls to 2015 Low as Consensus on Fed Grows

  • Odds of Fed rate increase in December advance to 68%
  • Stability contrasts with August turmoil on China devaluation

Treasury volatility tumbled to the lowest level this year, signaling there’s a growing consensus that the Federal Reserve will raise interest rates at its December meeting.

The Bank of America Merrill Lynch MOVE Index, which measures price swings in U.S. debt, fell to 67.69 basis points on Monday, the least since Dec. 26. Signs of stability in financial markets contrast with a jump in the index amid the turmoil stemming from China’s shock currency devaluation in August.

“There was uncertainty” over what the Fed would do earlier this year, said Kim Youngsung, head of overseas investment in Seoul at the Government Employees Pension Service, which has $12.8 billion in assets. “Nowadays, everybody’s sure the Fed’s going to increase the interest rate in December. That’s why we haven’t had high fluctuations.”

The U.S. 10-year note yield rose two basis points, or 0.02 percentage point, to 2.29 percent as of 7:18 a.m. New York time, according to Bloomberg Bond Trader data. The 2.25 percent security due in November 2025 fell 6/32, or $1.88 per $1,000 face value, to 99 21/32.

Yields are too low to buy, Kim said, adding he’s waiting for 10-year yields to increase to 2.50 percent. The median estimate of economists surveyed by Bloomberg is for them to rise to 2.31 percent by year-end.

Policy Tightening

U.S. central bank officials stressed last week policy should be tightened gradually after interest rates are increased for the first time since 2006. New York Fed President William C. Dudley said the conditions for liftoff “could soon be satisfied.”

Fed officials decided against raising rates at their September meeting and held off again in October. Fed Chair Janet Yellen said on Nov. 4 that a December rate increase in the U.S. is a “live possibility” if economic data remain strong.

Futures contracts show a 68 percent chance the Fed will act when it meets Dec. 15-16, up from 50 percent odds at the end of October. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

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