(Bloomberg) — U.S. Treasury traders capped off a tumultuous week with a measure of bond market volatility soaring to its highest level of the year, hinting at more turmoil to come.
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Yields first rose sharply in a ferocious five days of trading, with the 10-year Treasury yield above 4.2% for the first time since July. The move came despite little fresh catalyst as investors continued to reassess the outlook for interest rate cuts by the Federal Reserve and the U.S. election.
This week’s back-and-forth suggests even more volatility in the coming days as the U.S. bond market must navigate a myriad of events, from key jobs data to the U.S. presidential election to the Federal Reserve meeting. . The ICE BofA Move Index, which tracks expected changes in U.S. Treasuries next month, rose to its highest level this year on Tuesday.
“We’re in a new regime of increased volatility, which hasn’t been the case for the past 10 years,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management. “Volatility will only increase as we get closer to the election.”
The 10-year Treasury yield rose 2 basis points to about 4.24% on Friday, widening to 15 basis points for the week. The yield on two-year bonds rose to 4.11% on Friday, the highest level since mid-August, as oil prices rose.
Where next?
Before this month, the bond market was at its highest level in 14 years. But October’s losses eroded those gains, and Treasuries are up just 1.7% since the beginning of the year, lagging behind the 4.4% return on their cash equivalents, Treasury bills.
Arif Hussein, chief investment officer of fixed income at T. Rowe Price, said the 10-year Treasury yield will test 5% over the next six months due to rising inflation expectations and concerns about U.S. fiscal spending. Billionaire investor Paul Tudor Jones said he avoids bonds because “all roads lead to inflation,” echoing the views of Stanley Druckenmiller, who said he sold bonds short.
Still, some technical indicators suggest that this week’s decline in U.S. Treasuries may have peaked too far. Additionally, the 10-year Treasury yield has already risen more than 50 basis points since the Fed cut it by half a percentage point in September, defying expectations that the start of an easing cycle would provide a tailwind for bond investors.
Rather, Friday’s trading showed a willingness in the options market to hedge against lower yields, with large positions in hopes of lowering the benchmark rate to about 4.12% by Monday’s close.
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Priya Misra, a portfolio manager at JPMorgan Asset Management, said the selling was driven by “the perception that the risk of a recession is not that high” and “the market pricing in the risk of a landslide Republican victory.” said. “I think this move is overkill,” he said, but investors don’t have much confidence to intervene given the election risks.
Concerns about the worsening fiscal and inflation outlook from President Trump’s tax cuts and tariff plans have fueled speculation that Republicans will control both the White House and Congress, hurting appetite for long-term debt. are.
But before the election, investors have a chance to scrutinize next week’s jobs report and PCE price data for clues about how quickly and to what extent the Fed will lower borrowing costs.
Looking at interest rate swaps, traders expect the Fed to cut interest rates by 122 basis points (bp) by September 2025, compared to the 195 basis points (bp) priced in about a month ago. It is compared with. The Fed will begin a two-day policy meeting on November 6, the day after the election.
And on the bond supply side, the Treasury is scheduled to reveal its borrowing plans for this quarter on October 30th. The government also plans to sell a total of $183 billion in two-year, five-year, and seven-year bonds next week.
–With assistance from Edward Bolingbroke.
(Updates prices in 5th paragraph.)
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