Trading Volatility Is the New Reality for Bond Investors

Jarred by daily double-digit moves in Treasury yields, bond investors are bracing for at least another year of rocky trading, abandoning hopes that in 2023 the market would return to normality.

That’s forcing them to ditch their old playbooks designed during calmer and more predictable times and look for flexible and nimble investments to ride the most-turbulent market since 2008.

Traders got another taste this week of the contrasting forces battering the market with bonds falling after a surprise cut to global oil production, only to bounce back hours later following weak economic data. That tone continued to prevail Tuesday after a softer reading on US job openings sent the two-year yield slumping sharply below 4%.

Trading in this environment requires more agility and a willingness to step in and opportunistically buy or sell when yields swing to extremes. It won’t be until the Federal Reserve ends its tightening cycle and the economic picture gets clearer that the market regains a more sustainable sense of calm, according to George Goncalves, head of macro strategy at MUFG.

It “was just wishful thinking” to hope for less rate volatility this year, Goncalves said. “It may not be until mid-2024 that rate volatility settles.”

With so much to digest in such a short period of time, the first quarter felt like a full year of drama for investors in the $24 trillion US Treasury market.

Recession fears in the initial weeks of 2023 moderated to hopes of a soft-landing, before morphing into the prospect of no-landing in February after stronger-than-forecast jobs and inflation readings fueled bets on higher rates. By early March, the two-year yield soared to as high as 5.08% — climbing over 100 basis points from its mid-January trough.