Treasury Volatility Dips to Lowest Since 2014 on Steady Fed View

  • U.S. debt extends gains after $23 billion 10-year note auction
  • Tepid growth keeps yields at levels deemed pricey by Goldman

A measure of expected price swings in Treasuries dropped to levels last seen in 2014, signaling a growing conviction among traders the Federal Reserve will maintain a gradual monetary policy path.

The Merrill Lynch Option Volatility Estimate MOVE Index reached its lowest in 16 months on Tuesday, after a persistent slide from a one-year peak reached in February. That was when 10-year Treasury yields touched their lowest level in more than three years, amid a global stock-market selloff and slump in commodity prices triggered by concern that China’s economy was slowing more than forecast.

Treasuries have been in a holding pattern, with prices supported by a slow projected pace of Fed rate increases and U.S. economic data that are falling short of forecasts, according to the Citigroup Economic Surprise Index. Yet it’s unlikely Treasuries will rally further from current levels without a significant economic slowdown, Goldman Sachs Group Inc. analysts wrote in a note Tuesday.

“We’re stuck and waiting for one of these things to break -- either something bad could come back into the global economy, or the Fed could say they’ve seen enough stability and are ready to go”’ raise rates again, said Thomas Roth, senior trader in New York at Mitsubishi UFJ Securities USA Inc.

The yield on benchmark Treasury 10-year notes fell four basis points, or 0.04 percentage point, to 1.72 percent as of 1:10 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 was 99 3/32. 

Treasuries extended gains after the U.S. sold debt maturing in 2026, part of $62 billion of planned note and bond issuance this week. Indirect bidders, a class of investors that includes foreign central banks and mutual funds, bought 73.5 percent of the 10-year notes sold, the highest on record. The sale was rated outstanding in a Bloomberg News survey of six primary dealers.

At a $24 billion three-year note sale Tuesday, the bid-to-cover ratio, which measures the number of bids submitted relative to those accepted, was the highest since January.

“There’s just tremendous demand for U.S. Treasuries,” Roth said. “It’s a liquidity grab and it continues to mesmerize everyone.”

The MOVE Index of implied volatility in Treasuries fell for a third day on Tuesday to 63.97, the lowest since December 2014.

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