Volatility in Treasuries sank to its lowest level in the past decade in 2004, in large part due to the Federal Reserve's widely telegraphed rate hikes and the lack of any exogenous shocks. Yields on the 10-year stayed in a 120-basis point range this year and have stayed even more stable in a 40-bp spectrum during the last six months. By contrast, last year yields on the 10-year bounced around in a 150-bp range. As of Dec. 22, the 10-year yielded 4.18%.
Yields on the 10-year are also ending up just slightly above where they started the year. This marks the smallest year-over-year move since 2001, according to George Goncalves, government strategist at Banc of America Securities.
Yields were kept low in spite of rising rates because of strong foreign central bank demand for Treasuries, said Josh Stiles, senior bond strategist at IDEAglobal.
The year-long period of low volatility is a change from last year, when a perceived disconnect between the Fed's words and actions caused volatility to spike, said Gregory Elders, government strategist at Merrill Lynch. He pointed to a large jump in Treasury yields after the Federal Open Market Committee's June 2003 meeting, when it lowered the Federal Funds rate by 25bps even though the market had expected a 50bps easing. This year, the Fed has been more transparent. "The Fed has given more guidance through it's language and has been ahead of the curve," Goncalves said.
