Long-End Treasuries Fluctuate by Most Since 2020 Pandemic Onset

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

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

The US 30-year yield jumped almost 10 basis points Monday. It’s averaged a shift of almost 13 basis points over the last five trading days. That’s the highest in more than three years and far exceeds the average daily move of 3.8 basis points seen over the past decade.

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 policymakers push back against that scenario and stress the central bank’s willingness to hold interest rates higher for longer.

“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 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.

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 yields inched up two basis points to 4.87% on Tuesday while the two-year yield was little changed at 5.1%.

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.

–With assistance from Stephen Kirkland.

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