Janet Yellen, chair of the U.S. Federal Reserve.
U.S. Treasury 10-year yields swung in a range of more than 20 basis points for a second successive week, the first back-to-back moves of that magnitude since July 2013. A gauge of volatility in the market climbed to a 16-month high. Federal Reserve Chair Yellen used a meeting this week to prepare the market for higher interest rates next year, after the central bank ended bond purchases in 2014. Japanese notes rallied today as the Asian nation’s central bank maintained easing.
Treasuries fell for a third day, sending the benchmark 10-year yield up two basis points to 2.23 percent as of 6:38 a.m. in London, according to Bloomberg Bond Trader data. The 2.25 percent note due November 2024 slid 5/32, or $1.56 per $1,000 face amount, to 100 5/32.
“The markets are a bit complacent, we think, about this new Fed regime,” said Scott Mather, one of the managers for the Pimco Total Return Fund, the world’s
biggest bond fund. “Investors should think about having a high-quality anchor in their portfolio, preparing for more volatility,” he said on Bloomberg Television’s “First Up” with Angie Lau.
Pimco is seeking high-quality, liquid bonds for its holdings, said Mather, who spoke from Newport Beach, California, where company is based.
Australia, Japan
Australia’s 10-year yield increased nine basis points today to 2.94 percent. Stock gains are curbing demand for the safest assets, said Ali Jalai, a bond trader at Bank of Nova Scotia in Singapore. Japan’s Topix (TPX) index of shares advanced 2.2 percent, after the Standard & Poor’s 500 Index (BUSY) rallied 2.4 percent.Japan’s two-year yield dropped to minus 0.04 percent, the lowest on record, while the yield on 5-year notes fell to an unprecedented 0.03 percent. The 30-year yield fell to 1.33 percent, the lowest since April 2013. The BOJ maintained its unprecedented bond-buying program at a meeting today to support the economy and revive inflation.
The Fed said Dec. 17 it will be “patient” on the timing of the first rate increase since 2006, replacing a pledge to keep borrowing costs near zero for a “considerable time.”
An index measuring 10-day price volatility in the Treasury market rose to 5.23 on the same day, the highest level since August 2013. It was 5.19 yesterday. The gauge has averaged 3.14 in the past 12 months.
A plunge in the Russian ruble to a record low and a slide in oil prices that sent crude to its biggest loss in 2014 in six years helped drive volatility as investors sought the relative safety of government debt.
Withdrawing Support
The Fed is withdrawing support as the U.S. economy recovers from a recession that began in December 2007 and ended in June 2009. Policy makers in October ended the bond purchases they had used to put downward pressure on borrowing costs.The Bloomberg U.S. Treasury Bond Index returned 5.8 percent in 2014 through yesterday, set for the biggest annual advance since 2011.
The U.S. has the world’s biggest bond market with $12.5 trillion of government debt. Japan is second with $8.36 trillion and the U.K. ranks third with $2.22 trillion.
“A lot of the volatility was caused by people preparing for what the Fed was going to say,” said John Gorman, head of dollar interest-rate trading for Asia-Pacific at Nomura Holdings Inc. in Tokyo. “If there are any big flows to come through, the market will be a bit whippy given the fact that liquidity is light” as the year ends, he said.
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