(Bloomberg) – For bond traders, rising bond yields are not difficult to predict. It is the short-term fluctuations that are causing discomfort.
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The world’s largest bond market is being hit by the longest string of volatility since the start of the financial crisis in 2007, marking a complete break with the stability seen throughout the period. length of historically low interest rates. And the uncertainty driving it doesn’t seem likely to fade any time soon: inflation is still at a four-decade high, the Federal Reserve is raising interest rates aggressively, and Wall Street is struggling to gauge see how well an economy still recovers. will hold.
As a result, money managers see no respite from the chaos.
“The volatility of the bond market will continue to increase over the next six to 12 months,” said Anwiti Bahuguna, portfolio manager and head of multi-asset strategy at Columbia Threadneedle. She said the Fed may pause rate hikes next year just to resume if the economy is stronger than expected.
Continued volatility has left some big buyers on the sidelines, cashing in on a market that is competing for its worst annual losses since at least the early 1970s. Five, analysts at Bank of America Corp. warns that Treasury market liquidity – or the ease with which bonds are traded – has been at its worst since the Covid crash in March 2020, making it “fragile and vulnerable.” shock”.
After retreating from June to early August, Treasury yields rebounded as a key gauge of inflation in September rose to its highest level since 1982 and employment remained high. Those numbers and comments from Fed officials have prompted market expectations that the Fed will push rates to a peak near 5% early next year, up from 3-3.25% today.
Next week’s major data releases are not expected to change that outlook. The Commerce Department is expected to report that an inflation gauge, the personal consumption expenditures index, accelerated to a 6.3% annualized rate in September while the economy expanded 2.1. % in the third quarter, recovering from a decline in the previous three months. Meanwhile, central bank officials will be in for a period of self-imposed silence ahead of their November meeting.
The widespread expectation that the Fed will issue a fourth straight 0.75 percentage point on November 2 has effectively pushed questions about where monetary policy will go next year. There is still much debate about how high the Fed’s key rate will ultimately be and whether that will tip the economy into a recession, especially in light of the rising risks of a global recession. demand as central banks around the world tighten.
Uncertainty was highlighted on Friday, as yields on two-year Treasuries rose, falling only as much as 16 basis points after the Wall Street Journal reported that the Fed is likely to discuss plans to likely to slow down the rate hike after next month.
“If they take a pause after inflation falls and the economy is slowing, then market volatility will decrease,” said Steve Bartolini, fixed-income portfolio manager at T. Rowe Price. “The Fed pause date will see a decline in volatility, but we are unlikely to return to the low volatility regime of the 2010s.”
While high volatility can present a buying opportunity, any attempt to bottom is thwarted as yields move higher. Furthermore, investors also note that recessions and financial crises following excessive monetary tightening in the past have been associated with notable spikes in volatility.
Bob Miller of BlackRock Inc., head of the basic fixed income division of BlackRock Inc. But for other investors, “there will be an opportunity to take advantage of the downside in the market and build a fixed-income portfolio with an attractive yield above 5%.”
However, he expects the market to continue to be disturbed by the price change. “The implied volatility is clearly the highest since 1987 outside of the global financial crisis,” Miller said. “We are not going back to the experience of the last decade,” he said, “anytime soon.”
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