There’s a lot of focus right now on bonds, but also on bond volatility, and particularly US bond volatility.
One bank on Thursday lamented US Treasurys “trading like penny stocks.” It was an exaggeration. Sort of.
“Trading like a penny stock indeed! Only (perhaps, a little) less manipulated?” wondered one reader. An astute remark and perhaps in a way the commenter didn’t fully appreciate.
One problem with Treasurys — one reason they’re trading like Spongetech in its “prime” — is that they aren’t being manipulated. Well, they probably are. All markets are manipulated in one way or another. But they’re not being manipulated by a price-insensitive buyer armed with a printing press anymore.
What you’re seeing in Treasurys, to an extent anyway, is price discovery for an asset class where supply is ballooning and a key source of demand (Fed-buying) is out of the picture. We’re in the process of finding out what the actual, real clearing price is. That in itself is a good case for elevated vol.
There are other arguments for why bond vol should be higher in an absolute sense, but also relative to equity vol. “The public sector (or the government) is picking up most of the bill from higher rates and transferring the benefits to the private sector,” SocGen recently remarked, of the disparity between sharply higher interest burdens for governments and lower interest payments for US corporates (which did a better job of terming out their debt in 2020 and 2021). That, the bank suggested, helps explain a historically low VIX/MOVE ratio+.
But what about the MOVE itself? Can bond vol sustain itself at these levels? The answer, according to Harley Bassman, is probably not.
“The MOVE is back above 140. It’s time to send the bond market to its room for a time out,” he said this week.
Bassman, you’ll note, is qualified to comment on the MOVE by virtue of having created it. “The MOVE at 140 implies a yield change of ~9bps a day for the next month,” he went on. “That’s not sustainable.”
Regular readers will recognize the logic. It’s the same dynamic that can cause equity vol to collapse under the weight of its own implied expectations. Bassman drove home the point. Current levels on the MOVE are “similar to the VIX near 50.”
One Zurich-based investor with an impressive CV had a suggestion for Bassman: “Perhaps we just need to get used to a structurally higher bond vol environment when the largest price-insensitive buyers in the world (central banks) step away from markets.”
Maybe Central Banks are stepping away for now- but at least in the US, banks are stepping up in the place of the Fed and buying USTs directly instead of borrowing from the Fed, via ONRRP- which has declined to $1.265T from a high of $2.4T.
Once this facility falls back to zero- we will see if the Fed is “forced” to step back in as buyers.
Not really. Banks are shedding duration. And the RRP dynamic you’re talking about is primarily money market funds. And the transformation you’re referring to is RRP—>T-bills, not bonds.
Naively speaking, the chart suggests that MOVE can go, and has gone, higher for longer. Economic times were different then, but not in a way that is inconceivable today, and QT wasn’t a thing then because there had as yet been no QE.
Also naively, which of the drivers of higher 10Y yields look likely to fade soon?
– Inflation
– Supply
– Anti-demand (QT, AOCI, etc)
– Uncertainty
– Dininished faith in “adults” in D.C.
– Safer/higher yields on short end
I’m sympathetic to the appeal of “locking in“ high long term yields now. Is locking in a yield ~100 bp above today inflation (some measures) “compelling” yet? 7% surely would be, 6% probably, but 4.7%?
Harley timed the release of PFIX well!
We are going to find out the real cost of the debt in the fun house distortion.
Yes
Oh god, show us things as they are……