Treasury Yields at Almost Four-Month Lows Before Auctions
Volatility in the $11.4 trillion U.S. Treasury market dropped to a record low as the Federal Reserve’s unprecedented bond-buying program damps price swings in the world’s biggest securities market.
A measure of market expectations of interest rate changes, the Merrill Option Volatility Estimate, or MOVE, index fell to 50.58 basis points yesterday, the least on record. The average for the past decade is 96.7 basis points.
“Volatility is low because of the Fed’s intervention in the Treasury market, both with communication and quantitative easing,” said Zach Pandl, a senior interest-rate strategist in Minneapolis at Columbia Management Investment Advisers LLC, which oversees $340 billion. “Volatility should pick up as the economy recovers and as rates rise.”
The Fed has injected more than $2.5 trillion into the economy to fulfill the twin mandates of full employment and price stability in a program that’s known as quantitative easing, or QE. The central bank is buying $85 billion in Treasury and mortgage securities per month.
Wall Street’s biggest bond dealers see little chance the Fed will slow the pace of debt purchases, designed to boost economic growth before year-end, even as policy makers face calls to curb the buying.
“The Fed is not going to quickly back away from support of the Treasury market,” Pandl said. “If the Fed is managing the process of rising rates, volatility could stay really low even as it starts to exit from its easy policy stance.”
Of the Fed’s 21 primary dealers, 14 said in a Bloomberg survey that the central bank won’t start to reduce its $85 billion monthly bond buying until the last three months of 2013. Twelve forecast they will end in mid-2014 or later. Fifteen say it will take until at least June 2015 for policy makers to raise the record low benchmark interest-rate target of zero to 0.25 percent.
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