For bond traders, the days of begging for more volatility may be over. Now they’re fretting about just how grisly the selloff can get.
Benchmark 10-year Treasury yields touched 2.88 percent Thursday, once again brushing up against the highest level since 2014, after a fleeting tumble Monday as stocks plummeted. While the Cboe Volatility Index, known as the VIX, is only about half of its recent peak, its bond-market cousin, the 10-year U.S. Treasury Note Volatility Index, just keeps climbing. It’s now the highest since April.
One worrisome thing for bond investors that’s contributing to higher volatility is the unknown: new Federal Reserve Chairman Jerome Powell. For years after the financial crisis, they could count on Ben S. Bernanke and Janet Yellen to essentially limit how far prices can fall in financial markets -- colloquially referred to as a “put,” after the option. In other words, the bet was that central bankers would add stimulus or, in recent years, halt their tightening path on any sign of unusual turbulence.
Judging by remarks from policy makers this week, who were unmoved by rising yields and the plunge in stocks, the Powell Fed isn’t rushing to signal that tendency.
“The market has been kind of having a panic attack -- we really haven’t heard from Powell and it would help if he made some soothing comments,” said Ed Yardeni, president of Yardeni Research. “I don’t think he wants to establish right away that he wants a ‘Powell put’ the way we had a ‘Greenspan put’ and a ‘Bernanke put.”’
No Harbor
Nothing seems to be going right for the world’s biggest bond market: An auction of 10-year notes Wednesday saw the weakest demand in five months; Japan dumped U.S. debt in December, making 2017 the largest exodus from Treasuries in a decade; and, as the Bank of England reminded traders Thursday, the global economy is humming.
For now, the market is moving toward higher yields, and strategists are hesitant to call an end to the rout. Momentum seems skewed toward further price declines, they say, even as relative-strength index analysis suggests Treasuries are on the verge of being oversold. The 10-year yield may test 3 percent in the next few weeks, according to BMO Capital Markets.
“The market looks to the Fed during times like this for calming,” said Ward McCarthy, chief financial economist at Jefferies LLC. Traders “probably have mixed emotions about what’s happened. On the one hand it lets some air out of the bubble. But on the other hand, there are some anxieties over how far it will go.”
Weaning Process
Bond traders are bracing for volatility across the Treasuries curve. A day after the stock-market rout, bets re-emerged on four Fed hikes this year, rather than the three signaled by officials. Then on Thursday, a block trade of put options targeted the 30-year yield to rise to 3.25 percent by Feb. 23, from about 3.14 percent now. That would be the highest level since 2015.
Whether you want to call it a “bear market” or not, the march higher in yields -- and volatility -- may persist as long as the Fed is unwavering in the face of equities jitters.