Treasury Swings Muted as Chances of Fed Rate Increase Diminish

BofAML's Meyer: The Fed Has Communication Issues
  • Volatility gauge holds near lowest in more than 18 months
  • Futures show 22% chance of Fed rate hike, from 32% last week

A gauge of Treasury-market volatility hovered around the lowest levels seen in more than 18 months as the chances of an interest-rate increase by Federal Reserve officials at September’s meeting receded.

The Bank of America Merrill Lynch MOVE Index, which measures price swings in U.S. debt, held close to the lowest level since December 2014, reached Aug. 10. Futures pricing indicated a 22 percent chance of tighter policy this month, according to data compiled by Bloomberg. That’s down from 32 percent after the Labor Department’s weaker-than-forecast employment report on Sept. 2. The calculations assume the effective fed funds rate will average 0.625 percent after the central bank’s next boost.

“The Treasury market mood appears to suggest expectations of a solid but not spectacular economic outlook, thus restraining the Fed from moving too aggressively,” said Orlando Green, a rates strategist at Credit Agricole SA’s corporate and investment-banking unit in London. “Volatility is low”, reflecting a “a subdued outlook as well as difficulties in trading various risks, such as external ones,” including economic conditions in China and the U.K.’s decision to leave the European Union, he said.

“The risks still linger abroad in particular,” Green said. “Hence, there is a lack of desire to sell Treasuries even though buying in size at these levels isn’t desirable either.”

The Bank of America Merrill Lynch MOVE Index ended Wednesday at 64.07, having closed at 63.34 on Aug. 10. The benchmark Treasury 10-year note yield was little changed at 1.54 percent as of 6:50 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 99 21/32.

Labor Market

A lower-than-predicted reading last week on August payrolls was followed by data Tuesday that showed the U.S. services sector grew last month at the slowest pace in six years. Traders will be looking for more clues on the state of the labor market Thursday, with a report forecast to show initial jobless claims rose 2,000 last week to 265,000.

Fed officials are scheduled to next meet on Sept. 20-21, having stood pat on rates this year and twice pared projections for the path of increases. San Francisco Fed President John Williams said Tuesday that the U.S. economy is “in good shape and headed in the right direction,” without indicating whether he was leaning one way or another regarding a rate increase. Williams does not vote on monetary policy this year.

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