A gauge of swings in Treasuries approached the lowest in almost two years, as investors refrain from setting new positions before the US presidential election and amid the outlook for higher Federal Reserve (the Fed) interest rates.
Three-month implied volatility on US 10-year interest-rate swaps, a measure of projected yield fluctuations over the next 90 days, touched 68.8 basis points on Thursday. It reached 67.50 level last month, the lowest since November 2014, according to data compiled by Bloomberg.
“If you want to buy bonds, it’s not a good time,” said Hiroki Shimazu, an economist and strategist at the Japanese unit of MCP Asset Management in Tokyo. “Whoever wins the presidential election will be negative for the bond market because they’ll plan a large economic stimulus package. There’s higher inflation.” In their third and final debate, the two main US presidential candidates battled over their tax and spending plans, with Democratic contender Hillary Clinton saying she wanted to see the “biggest jobs program since World War II.”
The Republican nominee Donald Trump presented himself as an expert negotiator, repeating his pledge to renegotiate the North American free-trade agreement if elected.
Trump trailing
The face-off came after a tumultuous few weeks for Trump, with Clinton leading the Republican nominee by 9 percentage points in a Bloomberg Politics poll of likely voters nationwide. Clinton’s policies are better-known than Trump’s, and riskier assets will benefit as her candidacy improves, while financial markets may become more volatile if Trump gains ground, Shimazu said.
The yield on 10-year Treasury notes was little changed at 1.75 percent as of 12:53 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 97 25/32.
Treasuries have slumped in October as a bond-market gauge of inflation expectations rose to the highest five months. The probability of a US rate increase by December has climbed to 64 percent, Fed fund futures indicate, from 59 percent at the end of September. Still, Fed Chairman Janet Yellen, in a speech last week, laid out the argument for keeping monetary policy easy, while hinting at letting the economy run hot.
‘Mostly positive’
The US economy maintained a steady growth pace between late August and early October, as a tight labor market with nascent wage pressures contributed to a “mostly positive” outlook, according to the Fed’s latest Beige Book economic survey.
Traders await the European Central Bank’s policy-setting meeting on Thursday for signals about its monetary stimulus efforts. Most economists in a Bloomberg survey predict it will prolong its bond-buying program, which is soaking up €80 billion ($88 billion) of debt a month, and won’t start to taper its asset purchases before the second half of 2017.
“We’ve got a lot of uncertainty hanging over the markets,” Kathleen Gaffney, the co-director of investment-grade fixed income at Boston-based money manager Eaton Vance Corp., said in an interview on Bloomberg Television this week. “When you stack up the downside versus the upside, it’s skewed more for the downside” in Treasuries, she said. “You just want to get out of the way.”