Treasuries Volatility Falls as Bonds Becalmed After Fed Increase

  • Bank of America MOVE index drops to lowest level this year
  • Fed likely on hold next two meetings, futures indicate

Treasuries volatility fell to the lowest this year as the Federal Reserve’s decision to raise interest rates for the first time since 2006 removed uncertainty from fixed-income markets.

Bank of America Corp.’s MOVE Index, which measures price swings in U.S. government debt, slid to 67.67 basis points Thursday, the least since December 2014. The Fed raised its benchmark by a quarter point Wednesday and reiterated the view that further adjustments will be gradual.

Traders are signaling that they don’t expect policy makers to act again until at least April, futures contracts indicate. Treasuries rallied for a second straight day Friday as stocks declined and oil held reached a six-year low, damping inflation expectations and raising the appeal of U.S. government debt.

“Some measure of uncertainty has lifted” with the Fed decision, said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “Treasury trading is going to be dominated by risk-asset sentiment and global flows that are energy-related.”

The U.S. 10-year note yield fell four basis points, or 0.04 percentage point, to 2.19 percent as of 1:19 p.m. in New York, according to Bloomberg Bond Trader data. The 2.25 percent security maturing in November 2025 rose 3/8, or $3.75 per $1,000 amount, to 100 18/32.

Flat Month

U.S. government securities have returned 0.04 percent this month after declining about 0.4 percent in October and November, based on the Bloomberg U.S. Treasury Bond Index.

The Fed will probably keep interest rates unchanged at least for its first two meetings next year, in January and March, futures contracts show. The probability the central bank will act by April is about 50 percent.

Forecasts by Fed officials imply four quarter-point rate increases next year. Fed Chair Janet Yellen said the Fed’s decision reflects its confidence in America’s economy.

U.S. policy makers “did a good job,” said Philip Marey, a senior markets economist at Rabobank International in Utrecht, Netherlands. Yellen’s speeches before the decision were clear and the statement and press conference stressed the gradual and data-dependent nature of the hiking cycle, he said.

BlackRock View

Bonds may still swing around as investors hunt for yield, according to Rick Rieder, chief investment officer of fundamental fixed income at BlackRock Inc., the world’s largest money manager, with $4.5 trillion in assets. Investors will be able to digest the Fed moves, New York-based Rieder wrote in a report after the Fed announcement.

“If handled in the cautious manner that we anticipate, we don’t think rate normalization in itself will be a significant source of volatility in the year ahead,” Rieder wrote. “That is not to suggest that markets won’t be volatile, as they likely will, but a very modestly higher rate regime will not be the primary cause.”

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