(Bloomberg News) Price swings in the Treasury market are approaching the smallest levels in four years, a sign that the end of the Federal Reserve's $600 billion bond-purchase program next month won't cause a sell-off in government debt.
The Merrill Option Volatility Estimate, or MOVE, index fell to 74.80 basis points on April 25, within 0.7 of its lowest level since July 2007, just before credit markets seized up and led to the worst financial crisis since the Great Depression. The index is down from a 12-month high of 125.2 on Dec. 15.
For all the concern over the $1.3 trillion budget deficit and a warning from Standard & Poor's that the U.S.'s AAA credit rating is in jeopardy, Treasuries posted the best returns in eight months during April, gaining 1.15%, according to Bank of America Merrill Lynch indexes. Investors were reassured by Fed Chairman Ben S. Bernanke, who said he's in no hurry to raise interest rates and that he will keep reinvesting proceeds of maturing debt held by the central bank in bonds.
"Volatility is showing the market is not worried about a massive yield spike" said Laird Landmann, a managing director at TCW Group Inc., which oversees $65 billion in fixed-income assets. "The market has given the Fed latitude to be deflation fighters rather than inflation fighters right now."
The Fed began a second round of asset purchases that's been dubbed quantitative easing, or QE2, in November after buying $1.7 trillion in securities through last year to help prevent deflation by increasing the amount of money in circulation. The Fed has been buying about $75 billion of Treasuries a month in a program that will end next month.
The U.S. is counting on the confidence of domestic and foreign investors to remain high as it sells record amounts of debt to finance the deficit.
Yields on Treasuries have fallen to an average of 1.81% from 5% in mid-2007 even though the amount of marketable Treasury securities has risen to $9.14 trillion from $4.34 trillion, Bank of America Merrill Lynch indexes show.
The Treasury Department-which is scheduled to auction $72 billion of 3-, 10- and 30-year bonds at its so-called quarterly refunding in coming days-got a boost last week as commodities tumbled and investors sought the safest assets.
The yield on the benchmark 10-year note fell 14 basis points, or 0.14 percentage point, to 3.15%, the lowest level on a closing basis since Dec. 7, based on Bloomberg Bond Trader Prices. The price of the 3.625% note due February 2012 rose 1 6/32, or $11.88 per $1,000 face amount, to 103 31/32.