Treasuries Drop Will Be Volatile on Stimulus Exit, BIS Says

Treasuries are set to extend losses and price swings may intensify as growth allows central banks to withdraw stimulus, the Bank for International Settlements said.

“Yields will go up as the economy recovers,” Stephen Cecchetti, economic adviser and head of the monetary and economic department at the BIS in Basel, Switzerland, told reporters on a conference call on May 31. “The ride to normality will almost surely be bumpy, with yields going through calm and volatile periods.”

Benchmark 10-year note yields rose the most since December 2010 last month amid speculation that the Federal Reserve will begin tapering its $85 billion a month bond-buying program. Chairman Ben S. Bernanke said on May 22 that the central bank could cut the pace of its purchases if policy makers see indications of sustained improvement in growth.

“Volatility per se is not necessarily bad,” Cecchetti said. “Price movements are an integral part of the price-discovery process in financial markets, especially when we are faced with unprecedented events such as exit from the current unconventional stance of monetary policy.”

Treasury 10-year yields climbed three basis points, or 0.03 percentage point, to 2.16 percent at 6:36 a.m. in New York. The rate climbed 46 basis points last month, the most since jumping 50 basis points in December 2010. Volatility, as measured by the Bank of America Merrill Lynch MOVE index, rose to 81.22 on May 29, the highest level in almost a year.

Securities in the bank’s Global Broad Market Index lost 1.5 percent in May, the steepest decline since April 2004.

“With the outstanding volume of government bonds greater than ever, interest-rate risk” is at a record high in most advanced economies, Cecchetti said. “These losses will be spread across banks, households and industrial firms. Robust balance sheets with high capital buffers are the best way to guard against the possible disruptions.”