Market participants expect volatility in Treasuries to drop even lower this year than last year--already the lowest in a decade--as the Federal Reserve continues its measured policy approach. They also forecast additional curve flattening.
However, strategists say 2004 will not be such a good year for Treasury Inflation-Protected Securities, despite the hype and talk of rising inflation.
"It will be very much a market for buying high-quality fixed income," said Peter McTeague, interest-rate strategist at RBS Greenwich Capital. He also thinks decreased volatility will occur as a result of the earlier release of the Federal Open Market Committee's meeting minutes, a change the policymaker recently adopted (BW, 12/17).
McTeague predicts the curve flattening in the Treasury market will continue, but at a faster and greater pace than the markets currently have priced in. While the forward market has priced in a 25 basis point flattening between two- and 10-year Treasuries for the whole year (from 107bps on Jan. 5), he foresees the curve flattening more than 30bps within the next three to six months.
The year will also see worse-than-expected performance from TIPS, despite the fact Bill Gross, manager of the world's largest bond fund and cio at Pacific Investment Management Co., recommends readers of his January investment outlook to buy the inflation-protected securities. "TIPS are being bid up for technical reasons and are being bid beyond inflation expectations. The fundamentals don't support that," said William Prophet, interest rate strategist at UBS.
