Treasury market volatility feels like pandemic-era 2020

Volatility is heightened by uncertainty but yields are still trending higher.

The Treasury market is serving up levels of volatility last seen during the pandemic-era turbulence of March 2020.

The U.S. 30-year yield shifted by almost 13 basis points a day over the last five trading days, the highest in more than three years and more than three times a much as the daily average over the past decade. The yield jumped five basis points on Tuesday in Asia as traders gird for fresh volatility.

The large swings pose a challenge to investors reckoning with the highest yield levels in more than a decade. They also underscore the dangers for traders drawn in by expectations the Federal Reserve’s hiking cycle may spur a recession, even as a surge in US bond scales sparks concern about the risks of holding longer-dated debt. Hamas’s strike on Israel and an expected ground offensive into the Gaza Strip are also adding uncertainty.

“When you have very inverted curves, and then they move back to more normalized curves, that’s historically the best time to buy bonds,” said Scott Solomon, a portfolio manager at T. Rowe Price Associates, Inc. “However, we’re still concerned about rising yields. There’s still a ton of supply coming from the US.”

The yield on the 30-year bond topped 5% this month for the first time since 2007, reflecting anxiety about a sustained tightness in Fed policy. A poor reception for a bond auction on Oct. 12 also highlighted skittishness about the increasing supply of Treasury debt. However, yields posted three steep declines last week as the threat of a broadening Middle East war fueled demand for haven assets.

The price of the U.S. 30-year bond jumped up and down by at least 2% over the last five trading days, the first time that’s happened since November 2020. An index of longer-dated Treasuries has delivered an 11% loss this year through Monday, after being up 8.6% in early April.

Japan’s auction of 20-year government bonds met weak demand on Tuesday to highlight the wariness investors are showing for longer-dated debt. In Australia, whose federal government just returned the budget to surplus, a sale of new notes maturing in 2054 went off smoothly.

HAVEN DEMAND

JPMorgan Chase & Co. chief global markets strategist Marko Kolanovic said such demand was one of the drivers for a decision to recommend investors increase their bond allocations.

“While it remains uncertain whether bonds have bottomed, we add back 1% to our government bond allocation given geopolitical risk, cheap valuations, and less pronounced positioning,” he wrote in a note dated Monday.

The 30-year Treasury yield surged above 4.9% on Tuesday while the two-year yield was little changed at 5.1%.

“If the front-end is pegged with the Fed not moving, these moves are going to be hitting longer-end yields,” said Blake Gwinn, head of US rates strategy at RBC Capital Markets. At the same time, “focus on supply and deficits has gone up massively.”

The daily yield fluctuations that occurred in March 2020 were caused by a global flight to cash at the onset of the pandemic. Shorter-maturity Treasuries earlier this year experienced daily yield shifts that rivaled or even exceeded those, as several US regional bank failures cast doubt on Fed interest-rate increases.

Since then, the foremost question about policy has shifted from what the peak level will be to how long it will remain there.

In many cases, views on higher long-end yields are being expressed via curve-steepening wagers rather than outright shorts, Gwinn said, calling it “one of the more crowded trades.” Any amount of counter-trend bull-flattening moves where long-end yields fall faster tend to snowball as investors seek to limit their losses, contributing to the 30-year yield swings, he said.