An intriguing phenomenon is taking place within the U.S. financial landscape, where a sense of underlying tranquility persists in both the bond and stock markets, despite recent oscillations in Treasury yields.
Over the past two weeks, a push-and-pull dynamic has characterized the U.S. government debt market. Yields initially ascended to one-month peaks, fueled by the notion that the Federal Reserve might delay interest rate cuts, a development that unsettled the stock market. Subsequently, yields retreated to levels unseen since late March, driven by renewed apprehensions regarding a potential U.S. economic downturn, culminating in the longest streak of declines in at least a year.
Surprisingly, amidst these fluctuations, overall market turbulence has remained subdued. This is evident in both the ICE BofAML MOVE Index, a metric gauging anticipated interest-rate volatility within the Treasury market, and the CBOE Volatility Index (VIX), a measure of expected volatility in the U.S. stock market. The VIX has displayed minimal movement throughout the year, while the MOVE Index has receded from its early 2023 highs, coinciding with the Federal Reserve’s ongoing rate-hiking campaign.
Industry experts attribute this relative stability to a clearer understanding of the economic trajectory. The deceleration of inflation and the increasing likelihood of a “soft landing” for the economy have contributed to a more predictable environment, easing investor concerns that previously fueled market fluctuations.
This sense of calm persisted even as the release of the consumer-price index and the Federal Reserve’s policy update loomed. Two-, 10-, and 30-year Treasury yields concluded lower for the first time in three sessions, following a successful 10-year auction. Concurrently, U.S. stocks largely closed in positive territory.
Positive corporate earnings, sustained consumer spending, and a general optimism about economic growth have bolstered investor confidence. However, lingering uncertainties about the future economic outlook remain, reflected in the fluctuations of the 10-year Treasury yield.
The prevailing yield levels across Treasurys, corporate bonds, and asset-backed securities are perceived as attractive, further contributing to the dampened volatility in the bond market.
A deeper examination of long-term U.S. government debt reveals a historical pattern. An analysis of the iShares 20+ Year Treasury Bond ETF’s price volatility over the past two decades indicates that significant increases in bond-market volatility have typically been associated with crises.
The current volatility level of 20+ Year Treasurys aligns with its long-run average, suggesting that a rapid shift towards lower yields and higher prices is unlikely without a substantial change in the macroeconomic landscape.
In conclusion, while recent fluctuations in bond and stock markets might suggest otherwise, an undercurrent of calmness prevails. This relative stability is underpinned by improved economic visibility and attractive yield levels across various fixed-income instruments.
Investors considering long-term Treasurys should approach this as a contrarian strategy, acknowledging that patience may be required for potential rewards to materialize. The evolving economic landscape, however, necessitates ongoing vigilance and adaptability.
