“The grand question is how tolerant will Powell be in playing the Volcker role if the economy heads south,” said William O’Donnell, managing director of rates desk strategy at Citigroup Inc. Until that is resolved, “volatility stays high,” he said.

‘Pretty Stretched’
While the recent Treasury rally on recession fears has trimmed some of this year’s losses, much of the daily trading remains focused on short-term movements, making the market susceptible to rapid shifts as positions are unwound or piled into. Recent options activity has focused on weekly bets on the 10-year yield, alongside sales of option premiums that are profitable unless the 10-year yield falls below 2.62% or rises above 3.45% by September.

Some investors with a longer-term focus, including buyers in Japan, have largely sat on the sidelines, waiting for more clarity about the economy and the Fed’s trajectory.

“We are pretty stretched in terms of volatility and it’s hard to keep it that way once more supersized Fed hikes get delivered” in the next three meetings and as the economy slows and inflation eases, said George Goncalves, head of US macro strategy at MUFG in New York. “This is the most ambiguous point of the business and rate-policy cycle.”

This article was provided by Bloomberg News.

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