Treasury Volatility Climbs as Traders Await Fed's High-Wire Act

  • Gauge of market price swings climbs to highest in five months
  • Futures show 76% probability of Fed liftoff on Wednesday

Treasury market volatility climbed to a five-month high as investors bet that the Federal Reserve will raise interest rates for the first time in almost a decade.

Futures contracts show traders are preparing for Fed Chair Janet Yellen and her fellow policy makers to raise rates as a two-day meeting comes to a close Wednesday. An increase would end the emergency policy of keeping the benchmark close to zero that was put in place in December 2008 to support the economy during the global financial crisis.

“The consensus seems to be for a pretty friendly rate hike -- it makes me nervous,” said John Briggs, a U.S. government-bond strategist in Stamford, Connecticut, at RBS Securities Inc., one of 22 primary dealers that trade with the Fed. “The first rate hike in nine years, the first rate move in seven years -- the Fed is a little bit nervous about how this plays out.”

An index measuring price swings over a 10-day period rose to 6.66 on Tuesday, the highest level since July 13, based on data compiled by Bloomberg. The gauge has averaged 4.71 this year.

The benchmark 10-year Treasury yield rose two basis points or 0.02 percentage point, to 2.29 percent as of 10:12 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.25 percent note maturing in November 2025 fell 6/32, or $1.88 per $1,000 face amount, to 99 21/32.

The Fed statement is scheduled for 2 p.m. in Washington, and Yellen is due to hold a press conference 30 minutes later. A delay in raising rates would likely lead to “abrupt tightening” that risks disrupting financial markets, she said in a Dec. 2 speech in Washington.

“It’s the most advertised Fed hike in history and the key is how they present it,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “It’s going to be volatile. It’s a high-wire act and it’s a tough call as to whether they’re going to carry it off or not.”

U.S. government securities have returned 1 percent in 2015, after gaining 6.2 percent in 2014, based on Bloomberg World Bond Indexes.

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