A Few Trades Moving $12 Trillion in Bonds Points to Volatile ’15

Bond markets are once again being plagued by a drop in trading.

While traders are just returning from vacations and being less active than usual, prices are swinging. Yields on sovereign debt globally have plunged to the lowest ever, with rates on 30-year Treasuries falling to the least in more than two years.

The moves have been exaggerated by Treasury trading that yesterday was 11 percent below last year’s average, based on activity at ICAP Plc, the largest inter-dealer of U.S. government debt. This means relatively few traders may be having a disproportionate effect on prices, even if there are some legitimate reasons for investors to plow into safer assets with oil prices tanking.

This “is mostly fundamental,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG, wrote yesterday in an e-mailed response to questions. “But with poor liquidity, things are moving more than the headlines would justify.”

Yields on 30-year Treasuries dropped the most yesterday since April 5, 2013, while rates on 10-year notes fell the most since Oct. 1. Yesterday’s activity was different from the panic that overtook debt traders on the morning of Oct. 15, when nothing-in-particular caused yields to go into free fall before largely rebounding.

Risk Off

Investors are piling into the safest debt as oil prices decline to the lowest in more than five years, Europe’s economy shows signs of weakening and concern increases that Greece may quit the region’s shared currency. This would all suppress the potential for inflation and put less pressure on the Federal Reserve to raise interest rates this year.

The violence of moves in the world’s biggest bond market may be exacerbated by a decline in liquidity. Trading was down 11 percent last year from 2007’s average, according to data compiled by the Securities Industry and Financial Markets Association.

About $291.5 billion of Treasuries were traded through ICAP yesterday. Investors exchanged about $5.9 billion of high-yield bonds, 15 percent below last year’s average, and $11.8 billion of investment-grade notes, 10 percent below the 2014 average, according to Financial Industry Regulatory Authority data.

The spread between yields on U.S. junk bonds and those on government debt has widened 0.17 percentage point since year-end to 5.21 percentage point, according to Bank of America Merrill Lynch index data.

Holiday Breaks

Of course, this week’s volatility may be a side effect of traders returning from ski slopes and tropical islands.

It’s “not unusual to have low volume, higher price swing days when investors are coming back into the office after a holiday break,” Michael Cloherty, head of U.S. rates strategy in New York at Royal Bank of Canada’s RBC Capital Markets unit, said in an e-mail.

Still, there’s plenty of time this year for a repeat of what happened on Oct. 15, when a gauge of volatility in Treasury prices rose the most since 1989. The first big trading day of the new year indicated it could be in the offing.

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