U.S. Treasury Market Is Most Treacherous Since Pandemic’s Onset
(Bloomberg) -- The U.S. Treasury market has become a minefield over the past month.
As bond traders around the world try to force central banks to respond to elevated inflation rates, unusually large price swings have taken their toll. Signs have emerged of a vicious cycle in which reluctance to participate in the market impairs liquidity, making large price swings even more likely.
As measured by Bloomberg’s U.S. Government Securities Liquidity Index, trading conditions in Treasuries are the worst since March 2020, when the pandemic spurred massive central-bank intervention around the world. The index measures deviations in yields from a fair-value model. As for expected volatility, the ICE BofA MOVE Index for U.S. bonds is near the highest since April 2020.
The Federal Reserve Nov. 3 announced plans to taper its buying of Treasuries from $80 billion a month, with the goal of ending it by the middle of next year. Chair Jerome Powell reiterated that the timeline doesn’t signal when rate increases will come, and that the Fed won’t hesitate to act “if warranted by inflation.” On Wednesday, bigger-than-expected increases in consumer price gauges for October unleashed the biggest Treasury market selloff since February.
“The Fed’s idea of confronting now 6% inflation is to take their balance sheet higher by another $500b over the next 8 months and still have rates at zero,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note to clients. “At least right now they are not credible, but we’ll see if the reality of the data and/or markets forces their hand to act more aggressively but to the risk of market valuations and eventually the economy.”
Boockvar expects the volatility gauge to move higher when Treasury trading resumes after Thursday’s U.S. bank holiday.
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