Bond-market volatility surges to highest since 2016

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Even as U.S. stocks have remained mostly placid despite increased trade war rhetoric from Washington and Beijing, bond-market volatility has hit its highest levels in 2 1⁄2 years.

U.S. government bonds have rallied this year amid expectations that the Federal Reserve will cut interest rates at least one time in 2019 to help quellworries around a U.S.-China trade war, which already have dealt a blow to confidence among multinational business executives and softened the global economy’s momentum. Nascent signs of weakness on domestic shores including a softer-than-expected employment report in May have sparked fears that the U.S. is finally succumbing to global gloom.

“Bond markets are seeing something that equity markets are not,” wrote Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

See: Here’s why stock-market bulls should fear the slump in Treasury yields

Di Galoma threw up a chart showing the MOVE index, which tracks traders’ expectations for volatility in the 10-year Treasury note in the next 30 days. This bond-market indicator shot up dramatically in May, matching levels of volatility last seen in Dec. 2016.

The 10-year Treasury note yield stands at 2.084%, near its lowest level since Sep. 2017. The benchmark rate has dropped around 60 basis points, or 0.60 percentage points, since the start of the year as calls for rate cuts have stepped up. Debt prices move in the opposite direction of yields.

Bloomberg

Merrill Lynch’s MOVE Index

Potential for a further uptick in volatility this week remains with policy makers from the U.S. central bank set to meet and issue their policy update on Wednesday. Analysts say the Fed may hint at easing rates in this week’s meeting, opening the door for a rate decrease later this year.

On the other hand, the U.S. stock-market has held mostly steady since May when President Donald Trump dashed hopes for a trade war resolution by launching a fresh volley of tariffs against Chinese imports, renewing worries around the longstanding trade dispute between the world’s two largest economies.

The S&P 500 is only off around 2% from its all-time high of 2,954 on May 1, Dow Jones Market Data shows.

The Cboe Volatility Index known by its ticker, VIX, is trading around 15, a level near the indicator’s 50-day and 200-day moving average. The VIX uses S&P 500 options to measure trader expectations for equity volatility over the coming 30-day period.

Read: Business conditions are at their worst level since the 2008 financial crisis, says Morgan Stanley