Volatility Flares Even Before ‘Bondmageddon’: Chart of the Day

Options traders are signaling that this month’s increase in the pace of swings in U.S. government debt yields is likely to continue even as their advance slows.

The top panel of the CHART OF THE DAY shows that the Bank of America Merrill Lynch MOVE Index, which measures implied volatility based on options for Treasuries due in two to 30 years, rose to a 2012 high this week. It climbed as Treasury 10- year yields, shown in the bottom panel, broke on March 14 above a range of 1.79 percent to 2.16 percent that had held since Nov. 1 and touched 2.29 percent, then the highest in more than four months. Option-implied volatility signals traders’ expectations for fluctuations.

“Although ‘bondmageddon’ is not here yet, the rise in yield volatility is likely to be a phenomenon that lasts as the general trajectory of yields is higher,” Thomas Tzitzouris, vice president of Strategas Research Partners in Washington, said in a telephone interview on March 21. “It’s probably going to be a choppy move higher. It may seem like the 10-year yield is not rising very far over a very short time period, but then over a longer period you’ll see the 10-year yields may have risen 100 basis points.”

The climb in Treasury yields this month has sparked speculation they may be poised for an extended surge. The benchmark 10-year yield increased about 30 basis points in March, touching 2.4 percent on March 20, the highest since Oct. 28, before slipping to 2.28 percent yesterday. It traded at more than 4 percent before the financial crisis struck in 2008.

Yields gained after the Federal Reserve raised its assessment of the economy this month, reducing demand for the relative safety of U.S. government debt. Comments in a statement after the Federal Open Market Committee meeting on March 13 led traders to cut bets that the central bank will embark on a third round of asset purchases under quantitative easing.

To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net