Mar 22, 2023 - Economy

Bond market swings are wildest since '08

Change in two-year Treasury note yields
Data: FactSet; Chart: Nicki Camberg/Axios

The banking crisis of recent weeks has ignited some of the wildest swings in the Treasury market in years.

Driving the news: In recent days, the most widely watched gauge of bond market volatility — the ICE BofA MOVE index — surged to the highest level since the last major U.S. financial crisis broke out in 2008.

  • The swings in two-year Treasury yields (charted above) are similarly at their most violent — to both the upside and the downside — since that time.

Why it matters: The yields on government bonds help determine rates for everything from auto loans to home mortgages to multibillion-corporate borrowings.

  • When this market whips around wildly, financiers find themselves unsure of the right price to charge borrowers for the use of their cash.
  • In periods of prolonged volatility, they pause lending altogether, creating a doom loop in investment and other economic activity.

What happened: Before the collapse of Silicon Valley Bank this month, "global macro" hedge funds were overwhelmingly positioned for the Fed to keep raising rates at a fast pace until inflation came under control, Reuters reports. These types of funds play in markets like currencies and government bonds, where prices are driven by big-picture economic issues.

  • But when the banking panic broke out, people instead rushed for the safety of government bonds, pushing rates — which move in the opposite direction of prices — sharply lower.

The impact: Looking at losses, traders rushed to unwind their trades.

  • That means those who had been betting on higher rates — and, therefore, lower prices — had to rush to buy bonds, supercharging the already big upward move in prices and downward dive in yields.

The bottom line: The wild volatility in the Treasury market reflects the general bafflement of investors, economists and traders during the current moment. No one knows how the brewing bank crisis will interact with the economy and the Federal Reserve's plans for interest rate hikes.

  • What we're watching: The Fed, of course, which makes its interest rate announcement Wednesday at 2pm ET. Buckle up.

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