Bond volatility shows signs of life

The spread between 10-year Treasury rates and bunds has reached its widest level in six months

As US Treasury yields climb to the highest in seven months, volatility in the bond market is also trending up.

Bank of America Merrill Lynch’s Move Index, a gauge of price swings in the US Treasury market, is close to the highest since May and its monthly average is on track to record a third consecutive rise.

Volatility is returning as moves in US yields diverge from their European counterparts. The spread between 10year Treasury rates and bunds has reached its widest level in six months. Investors are awaiting President Donald Trump’s decision on a Federal Reserve chair that may sway the path of American interest rates. A hawkish appointment to the influential role could lead to more market volatility, including a move higher for interest rates, according to John Lynch, chief investment strategist for LPL Financial.

In fact, some investors now argue that the recent period of low volatility in markets is coming to an end.

“We believe that the extraordinarily low-volatility regime that we are currently experiencing will be challenged moving into 2018 by a number of factors,” Amundi Group Chief Investment Officer Pascal Blanque and Deputy Group CIO Vincent Mortier wrote in a client note. These include monetary policy normalisation, a more mature phase in the economic cycle, a revival of inflation expectations and unpredictable geopolitical developments such as Brexit and North Korea, they said.

Still, not everybody is convinced market volatility is about to lurch higher. Lowvolatility regimes have often lasted for quite a long time, and the current one could well approach new records, according to Christian Hille, global head of multi asset at Deutsche Asset Management. Equity volatility remains at historically low levels.

“Occasional volatility spikes notwithstanding, however, what would drive volatility higher would be the prospect of any recession,” said Hille. “Hence we monitor economic as well as sentiment indicators carefully, which continue to look fairly reassuring.” Sensex (IN)