According to Bloomberg News, the rate of inflation, which is the hottest ever in the last 40 years, has fostered a period of volatility in the bond market, driving the investors to render protection to their portfolios by shopping for the hedges. A scenario of Treasury volatility occurs significantly when the central banks’ hawkish upheavals influence the market. As such, a similar phenomenon has already been initiated when Jerome Powell, the Chairman of the Federal Reserve, pronounced the word “transitory” and stated that it is retiring this word when inflation is being described. This occurrence has sent an expected swing in the index in Treasuries to a twenty-month high.
The final meeting of this year Wednesday of the central bank could prepare the platform for a turbulent period if the policymakers signal a rapid period of monetary tightening is necessary to tackle consumer prices.
This incident has given rise to a tendency among the fund managers to embrace a period of what is known as subtle swings in the bond market, which does not include the drama that occurred during the initial stages of the pandemic 2020. All they are doing is adding hedges to the portfolios as floating rate Treasury notes form, Treasury inflation-protected securities, and cheaper options. There is a two-fold task making things complicated. The first one is that volatility could spread to the equities from the bond market and other asset classes. The other one is tightening financial conditions leading the Fed to change heart, Bloomberg News reports.
In the past, Powell has manifested taking measures related to containing volatility in the market and setting the stage for policy decisions. The same scenario repeats as the central banks curb the asset purchases and set the stage for an increase in rates the following year.
However, experts think that the risk of increased inflation and a hotter economy can trigger rapid tightening as compared to what is anticipated.
The risk that has been mentioned above is already underway, giving rise to trading conditions that are turbulent in the $22 trillion Treasury bond market. The MOVE Index, which oversees Treasury volatility, surged to a 20-month high, attaining a reading of 90 towards the end of November, and is presently at 79, which is well above the average of the decade of 65.
The renewed focus of the central bank related to consumer price has already triggered a sharp drop in the expectations in the bond market, with the 30-year yield from trading at the lowest ever since the beginning of January.
The chances of the Fed fighting against an established inflation level while simultaneously attempting to seek to tackle the fallout from the broader financial markets have been adding to the elements that lead to spikes in volatility.
Bloomberg News reports that it is quite likely that the Fed may find itself in a mess by fighting inflation or living up to the consequences of the upheavals in financial markets given rise to by the higher rates.
