Treasuries Volatility Sinks to All-Time Low Before Fed Decision

(Bloomberg) -- Price swings in the $15.8 trillion Treasuries market are tamer than ever as investors wager that Wednesday’s Federal Reserve meeting will further crush volatility.

Bank of America Corp.’s MOVE Index, a gauge of implied volatility for U.S. government bonds, on Tuesday broke below its previous all-time low, set in 2017. The decline comes as policy makers are expected to lower their median projection for 2019 rate increases to just one, from the two anticipated in their last set of forecasts in December. The Fed is set to announce its policy decision at 2 p.m. Washington time.

What’s stifling yield swings? For Columbia Threadneedle’s Gene Tannuzzo, it’s central banks’ total transparency about plans to keep monetary policy accommodative.

“Rates volatility has evaporated, and I think you can thank Powell and Draghi for that,” said Tannuzzo, referring to the heads of the Fed and the European Central Bank. “When central banks provide guidance, verbally or through actions like quantitative easing, that interest rates are not going to move for a while, then rates volatility tends to decline.”

Bond turbulence has tumbled since year-end, days before Fed Chairman Jerome Powell and fellow officials started emphasizing they’d be patient in adjusting policy, a dovish pivot from just weeks earlier. Volatility has crumbled across asset classes as other developed-nation central banks have dialed back policy-tightening expectations.

Amid the tranquility in Treasuries, benchmark 10-year yields posted one of their narrowest monthly trading bands ever in February, plying an 11.6 basis point range. At 2.59 percent, the note’s yield is close to the lowest levels since January.

Tannuzzo, a manager of the $4.4 billion Columbia Strategic Income Fund, is wagering that the malaise is bound to lift soon. He purchased 1-year interest-rate payers and receivers swaptions, which amounts to a bet that yields could move either higher or lower to break out of recent ranges.

“External factors, like Europe and China, are at the top of my list,” Tannuzzo said. “If the economic weakness in Europe and China bleeds further into the U.S., this could cause a spike in rates vol, likely with the direction of yields being lower.”

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