Bond traders are getting no break from the wildest Treasury market in years.

The MOVE gauge of volatility has surged to its highest since the Covid crash of March 2020 as investors navigate conflicting cross-currents in the economic outlook.

On the one side, there’s persistent inflation and the Federal Reserve’s commitment to aggressively tighten monetary policy to contain it, which has pushed yields higher this year amid the biggest selloff in at least half a century. On the other is the rising risk of a recession, which has been tugging yields downward at times when investors sell stocks and plow funds into Treasuries as a haven.

Both forces are on display this week. The yield on the benchmark US 10-year note climbed three basis points to 2.83% in early Asian trade on Wednesday, after swinging in a range between 2.78% and 2.98% on Tuesday.

The Treasury two-year yield, which is more closely linked to the Fed’s policy rate, rose one basis point to 2.83% after falling the same amount the previous day. That leaves it almost equal to the 10-year yield after being below it on Tuesday. Such inversions of the yield curve signal an expectation that slowing growth will eventually necessitate lower short-term rates.

There’s likely to be no “summer lull for volatility” in bonds, said Erin Browne, a fund manager at Pacific Investment Management Co. in Newport Beach, California. Market conditions will remain trying until there’s a clear signal inflation has peaked, she said.

The ICE BofA MOVE index, a measure of 30-day implied Treasury volatility, rose to the highest level since the early days of the pandemic on Tuesday. Liquidity is also at its worst since then, according to a separate Bloomberg index, helping to exaggerate such price swings. The higher the index, the further bonds are trading from their perceived fair value.

Australia’s bonds jumped from the open Wednesday to follow US moves. The nation’s 10-year yields dropped as much as 13 basis points to 3.42%, while realized volatility for benchmark bond futures climbed to the highest level since March 2020.

The tug-of-war in the Treasury market is unlikely to subside until the outlook for the economy and the Fed’s interest-rate path are clarified. The release of the central bank’s June minutes on Wednesday and the monthly payrolls report on Friday will both be scoured for such clues.

While the employment report is expected to show job growth slowed last month, Fed Chair Jerome Powell has made it clear he is focused on raising interest rates high enough to tame inflation. That is stoking speculation the economy will lapse into a recession, as it did in the early 1980s when then Chairman Paul Volcker tightened policy aggressively to get consumer prices under control.

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