The bond market's version of the VIX — a volatility index — is freaking out.
What’s happening: The index that measures Treasury market volatility is flirting with levels not seen since the peak of the COVID-induced market crisis of March 2020.
Why it matters: Turbulence in safe haven Treasuries is a sign that markets aren’t functioning as smoothly as they should. And it comes as the Fed is only just beginning to extract itself from the COVID-era bond purchases that propped up the market.
- Problems with liquidity (the ability to easily buy and sell without moving prices sharply) in the Treasury market are concerning — and they "could spill over into broad financial stability concerns," wrote Javier Corominas, Oxford Economics' director of global macro strategy, in a research note Thursday.
State of play: Volatility can be something of a self-sustaining spiral.
- Big price swings trigger margin calls for hedge funds and speculative investors. That leads to selling, which leads to losses, which leads to more selling — and fuels further volatility, Corominas wrote.
Context: The benchmark 10-year Treasury's biggest one-day move in 2021 was a 0.16 percentage point drop on Nov. 26.
- This year: There have already been seven days with even bigger moves, as the FT reported last week.
- Thursday the 10-year went on a wild ride — the yield initially rose 0.15 percentage points after the CPI report, before clawing back about half of that.
The bottom line: The way the Treasury market functions during periods of stress has been a worry for a while now. And there's no shortage of theories for why the market has seemed to grow much jumpier lately.
- Here's a decent primer on the topic from the group of Wall Street bankers and traders advising the Treasury about issues in the market.
- For now, it will likely get worse before it gets better, wrote BofA Research analysts in a note this week.