Since breaking out to its highest levels in months, the U.S. 10-year Treasury yield has plodded along in a tight range, struggling to break through the significant 1% mark.
The reluctance of the bond market to succumb to the hype around the ‘reflation’ trade and breathe some volatility back into long-dated Treasurys reflects the Federal Reserve’s clear willingness to keep up its easy monetary policy in order to support a U.S. economy dragging itself out of the mire resulting from the coronavirus pandemic.
“Bond investors have been lulled to sleep by a steadfast Federal Reserve and ongoing economic recovery. Investor’s volatility expectations for U.S. Treasuries will likely not budge from abysmal levels until the Federal Reserve gets nervous and/or an inflation premium finally shows up,” said Ben Breitholtz, an analyst at Arbor Data Science, in a Tuesday note.
He found that whenever the 10-year yield yield hit a six-month high during the past two decades, it more often than not struggled to extend its climb in the following six months, as the chart above shows.
Indeed, the benchmark note yield hasn’t budged much since hitting its last six-month high despite investors seeing further clarity on a viable vaccine candidate and distribution over the past few weeks.
The 10-year Treasury yield
stood at 0.960% on Wednesday, only a basis point lower than its six-month high of 0.973% carved out in mid-November, Tradeweb data show.
And outside of 2007, such breakouts have led to declining bond-market volatility over the following months.
Ultimately, Breitholtz points the finger at the lack of uncertainty around the Federal Reserve’s interest-rate plans and continuous, fixed monthly asset purchases.
Fed Chairman Jerome Powell’s clear communications in contrast with the more ambiguous and vague statements of former Chairman Alan Greenspan has led to a steady decline in interest-rate volatility since the financial crisis of 2008.
“The Federal Reserve’s [bond-buying] along with clear communications offered a major counterbalance to economic policy uncertainty and the damaged labor market,” said Breitholtz.
The bugaboo of inflation could still upend the bond market’s placid trading, but even as inflation expectations have been buoyed by the potential for a post-pandemic future economy, investors have largely overlooked those fears as price pressures have not yet materialized.