Treasury Volatility Near Record Low, Defying Gold’s Wild Ride

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The $20 trillion U.S. Treasury market looks like a bastion of calm compared to all the hullabaloo over sharp moves in gold and the dollar.

While U.S. bonds have gained to touch record-low yields for short-term debt, volatility fell to a historic trough on Thursday and held close to it on Friday, according to the ICE BofA MOVE index. By contrast, the greenback has tumbled and gold soared over recent weeks on fears that inflationary forces may be set for a resurgence. Treasuries are so far proving to be immune, thanks to the Federal Reserve’s enormous stimulus and signs that it will keep rates low for years to come.

Treasury Volatility Near Record Low, Defying Gold’s Wild Ride

The Fed is expected to remain accommodative “for a long time -- which suggests rates should be well anchored,” said Pooja Kumra, a rates strategist at Toronto-Dominion Bank, who sees 10-year Treasury yields staying between 0.4% and 0.7%. They are currently around the middle of that range.

It’s a sign that traders believe they know what’s coming from the Fed -- support for bonds. At its meeting last week, Chair Jerome Powell vowed to use all tools to help the recovery and said that extreme caution would still be warranted. Yield-curve control or formal forward guidance are possible options the Fed could use.

In June, Powell said policy makers were “not even thinking about thinking about raising rates.” Investors have been paying heed, with five-year yields steadily making record lows last week.

Benchmark U.S. 10-year bonds slipped Monday, with yields climbing three basis points to 0.56%. Their German equivalent has seen yields hold in a narrow trading range around the European Central Bank’s deposit rate in the past two months.

What Bloomberg Intelligence says:

“The Fed has chopped off the tails of the yield distribution -- on the left side, it has pushed back on negative policy rates, and on the right side it will want to keep rates relatively low. Rates volatility may be used as a funder for equity volatility.”

-- Tanvir Sandhu, Chief Global Derivatives Strategist

The compressed moves compare with a continuing surge in U.S. stocks and a gauge of the dollar touching the lowest level in more than two years Friday. Meanwhile gold’s rally to record highs is like a “freight train” for RBC Capital Markets.

The demand for gold has been boosted by real yields on U.S. 10-year Treasuries, which strip out inflation, falling below minus 1% to a record low. Still, not all are convinced that the growing disconnect between Treasuries, the dollar and gold can last. NatWest Markets recommends betting on a rise in volatility through options.

“To achieve the current goldilocks environment, policy makers have had to unleash a fiscal and monetary arsenal never seen in modern history,” wrote James McCormick, global head of desk strategy at NatWest, in a note. “It is plausible it will all end in the same low volatility/low inflation/low term premia environment of the past 10 years. But it does seem a stretch.”

For Treasuries, things could change once the quieter summer trading period comes to an end in September and central banks reassess the outlook for the coronavirus, according to Toronto-Dominion’s Kumra. For now the path is still clear: carry on buying.

“Any sell-off is short-lived and considered as an opportunity to enter longs,” she said.

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