A widely watched measure of volatility in Treasury markets hit its highest level since 2016, as investors gird themselves for potential price swings ahead of an important Federal Reserve meeting on Wednesday.
Bank of America Merrill Lynch’s MOVE index, which tracks one-month implied volatility in the Treasury market, rose close to 81 on Friday, the most recent session for which data are available.
That is the highest level since December 2016, just before the Fed picked up the pace on interest rate increases over the next two years. The data are delayed.
This time, investors are looking for signals from the central bank that monetary easing is on the way, with expectations that a cut in interest rates will come in July. However, slumping inflation expectations have raised the possibility of a surprise cut in rates this week.
“It’s a classic wait and see trade,” said Jon Hill, an interest rate strategist at BMO Capital Markets. “The market doesn’t know what the next direction for interest rates is going to be but it knows there will be volatility.”
The 10-year break-even inflation rate, derived from prices of inflation protected government securities, dropped to 1.62 per cent on Monday, its lowest level since September 2016 and well below the Fed’s long-term inflation target of 2 per cent.
“The big thing right now is break-evens,” said Mr Hill. “It is concerning how low these levels have been.”