Volatility in the Treasury market rose significantly last week, leading market participants to speculate the end of a low volatility market. "The uncertainty about growth, inflation and the cumulative extent of [Federal Reserve] policy will contribute to maintain elevated volatility," said a UBS strategist. Last year, meanwhile, was distinguished by the lowest volatility in a decade, with 10-year Treasury yields staying in a 40 basis point range in the second half of the year (BW, 12/26). But realized volatility last week was 7.3bps per day, an increase over the average of 4.9bps since the start of the year. "We're going into a period where the Fed may not be sure what it's doing after [raising the Fed Funds rate to] 3%," said Josh Stiles, senior bond strategist at IDEAglobal.
A growing camp in the bond market believes the U.S. economy has hit a soft patch. On the heels of last week's Group of Seven meeting, global growth is very much on the bond market's mind. "You can't have stagflation in Japan and Europe and expect the U.S. to carry on in its merry way," said Thomas Tucci, executive director of fixed income at Mizuho Securities.
But conflicting numbers, such as a markedly improved Business Outlook Survey by the Philadelphia Federal Reserve, coming right after the New York Federal Reserve's weak Empire State Manufacturing Survey, ensure not everyone is in agreement about the economy's direction. "The market is becoming more data-driven; the data is not just a clear-cut one-way street," Tucci said. In addition, top-tier economic data such as payroll figures are not showing a clear downward trend, according to Ron Desautels, portfolio manager and government bond trader at Babson Capital Management.
