Treasuries Volatility Plunges as Interest-Rate Outlooks Converge

  • Index has tumbled 32% from one-year high touched in February
  • Traders curb wagers on price swings amid cautious policy path

Volatility in the $13.3 trillion market for U.S. Treasuries is plunging, approaching the lowest since 2014, as traders wager yields will remain in a narrow range amid broad-based demand for U.S. debt and assurances that policy makers will raise interest rates gradually.

Federal Reserve Chair Janet Yellen’s latest commitment to “proceed cautiously’’ with tightening U.S. monetary policy pushed traders to pare bets on when and how often the central bank will boost rates this year. A Bank of America Merrill Lynch index measuring price swings bond traders expect over the next year declined for a fourth day, touching the lowest this year.

Treasuries returned 3.3 percent in the first quarter, their best start to a year since 2008, amid swings in equity and commodity prices and as record-low bond yields abroad boosted the appeal of U.S. debt. Fed officials last month left rates unchanged and pared forecasts for 2016 increases to two from four, moving the central bank more in line with traders’ views on the path of monetary policy. Yellen said in a speech last week that caution was “especially warranted” in tightening U.S. policy amid heightened risks posed by the global economy. 

“Lower trading ranges, a dovish Fed, and continued demand for yield in U.S. fixed income led market participants to lower their projections for volatility going forward,” said Boris Rjavinski, a rates strategist at Wells Fargo Securities LLC in New York.

The yield on the benchmark 10-year note fell one basis point, or 0.01 percentage point, to 1.76 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 was 98 24/32.

Volatility Measures

The Chicago Board Options Exchange Volatility Index, known as the VIX, has also retreated amid a rebound in U.S. equities, declining by half since February. 

Volatility in the currencies market rose to the highest since 2011 last quarter as a worsening global growth outlook, coupled with diverging central-bank paths, prompted bigger swings in foreign exchange. The JPMorgan Global FX Volatility Index averaged 11.44 percent in February, the highest for any month since December 2011 and up from a low of 5.55 percent in July 2014. Its average for the year so far is 10.91.

After liftoff from near zero in December, the Fed is looking to tighten U.S. policy as central banks abroad maintain or increase stimulus amid slow economic growth and lackluster inflation.

Traders see a 22 percent probability the Fed will raise interest rates by June, down from a 38 percent probability assigned a week ago, according to futures data compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.

Yields were little changed Monday after economic data showed durable goods orders fell more than forecast in February, while declines in factory orders were in line with expectations.

The gap between yields on two- and 30-year Treasuries, known as the yield curve, flattened for a third day, falling to 1.86 percentage points.

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