(Bloomberg) -- Volatility in the U.S. government bond market is finally starting to diverge from equities and currencies.
Bank of America's MOVE Index, a gauge of price swings in the U.S. Treasury market, has risen about 5 points in the last two weeks. The Chicago Board Options Exchange's VIX Index and JPMorgan Chase & Co.'s currency volatility gauge have both declined in the same period.
Low volatility is normal for equities, but unusual for bonds in tightening cycles, Jefferies LLC strategists including Sean Darby wrote in a recent note to clients.
Also Read | Layoffs Are Rising In Tech, But These Skills Are Helping People Unlock Better Pay
Bond volatility has been “unusually depressed” in recent months, despite the increase in the federal funds target rate in June, according to the Bank of International Settlements, the coordinating body for the world's central banks. This contrasts with previous periods of monetary tightening during which volatility was close to its long-term average, the bank said.
Bond volatility could continue to rise because investors are underpricing President Donald Trump's tax reform efforts, according to Rick Lacaille, chief investment officer at State Street Global Advisors.
“It's a little bit like a coiled spring,” he said, speaking on Bloomberg Surveillance Monday. “Certainly in the fixed income market, where the MOVE index is low, people haven't really discounted the possibility of the Trump tax reform actually working.”
The market may also be mispricing the outlook for inflation, which could also spur an uptick in fixed-income volatility.
Plugging the New York Federal Reserve's Underlying Inflation Gauge into a bond valuation model would suggest the fair value for 10-year Treasury yields is 3.7 percent, compared with about 2.3 percent, Morgan Stanley Investment Management Inc.'s Jim Caron said in a recent note to clients.
--With assistance from Cecile Gutscher
To contact the reporters on this story: Cormac Mullen in Dublin at cmullen9@bloomberg.net, Sid Verma in London at sverma100@bloomberg.net.
To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Dave Liedtka, Eric J. Weiner
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
