Volatility is back in the bond market, and it’s hitting bank trading floors hard. But bond yields seem to be sending a different signal.
First, volume. Average daily bond trading fell 12.5%, more than the worst dive in the 2014 slump, the Wall Street Journal reports. J.P. Morgan analysts said last week that investment banking revenue could fall 15% from the first quarter as a result. Trading is often slowing in the second quarter, but the current slowdown is more than just seasonal.
Volatility is the prime culprit behind the step back, following the boom times in January and February. From late April to mid-May, the yield on the 10-year Treasury note was up more than 0.3%.
Second, what about those prices? Despite the backup, the 2.18% (early Tuesday morning) was far below the peak of 3.05% last year, according to Bloomberg.
Which means we are getting two messages from the bond market: Investors are nervous about an imminent Federal Reserve rate hike and traders are signalling any tightening measures are likely to get pushed back again as the central bank overestimates the strength in the economy. Writes Bloomberg:
Despite the backup in yields in recent weeks, bond prices still signal the unexpected slowdown in the economy was more than just the result of some bad weather that kept Americans indoors and idled factories in the first quarter. Regardless of when the first increase comes, futures show traders don’t see rates exceeding 1 percent by the end of 2016, versus the Fed’s estimate of 1.875 percent.
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