Treasury Volatility Is Just Starting With Big Swings on the Way

Published 17/02/2021, 09:09
© Reuters
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(Bloomberg) -- U.S. Treasuries are in for more wild gyrations, with volatility markets signaling that the benchmark bond yield could surge or drop by almost 30 basis points in the next three months.

The three-month implied volatility on 10-year swap rates -- a measure of how much bonds are expected to move -- jumped by the most since March on Tuesday, surpassing the levels heading into the 2020 U.S. election.

With the move, what’s known as the terminal breakeven indicates that traders are pricing for 10-year Treasury yields to either jump to 1.6% -- reached last February before the pandemic market meltdown -- from current levels, or drop all the way back to 1%.

The option price breakeven levels don’t necessarily determine specific targets but they do show the distribution of possible outcomes for bond yields have widened considerably. While they indicate the levels of 1% and 1.60% are on the table, they also suggest the risk of much higher rates has also risen.

The jump in Treasury yields is reverberating across the different asset classes, with stocks to gold and corporate debt weighing the implications of rising rates. The next few months will be crucial for the U.S. bond market as traders await the outcome of the stimulus debate amid signs that the global economy is regaining some traction.

Treasury 10-year yields jumped 11 basis points on Tuesday to 1.31%, the highest since February -- taking this year’s gains to around 40 basis points. The outsized move came as markets reopened after a U.S. holiday on Monday and saw strategists pointing to next week’s stimulus vote alongside various other drivers.

“It was probably a bit of everything: reflation, supply, technical breakthrough, all coming against a backdrop of investors uninterested in fighting the tide,” NatWest Markets’s Blake Gwinn wrote in a client note.

Strategists are split on the outlook, now that the 10-year yield has breached 1.30%. TD Securities has taken profit on a short 10-year Treasury position initiated on Jan. 8, suggesting the risk-reward is no longer compelling.

Some are also fading this latest jump in volatility. A seller of put options on 30-year bonds emerged late in the New York session on Tuesday, with the trader taking in $33 million in premium on a wager that any further rise yields will be contained.

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©2021 Bloomberg L.P.

 

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