US 10-year Treasury yields have climbed to 5%, but the bond market has not seen a similar jump in volatility. Options traders are expecting relatively limited movement in 10-year Treasury rates, even after the benchmark yield reached 5%. Three-month options on 10-year rates are currently pricing around 79.5 basis points of annualised volatility.
Even after the yield returned to 5%, rate volatility remained relatively low, showing that investors have not reacted with the same level of uncertainty seen during previous moves toward 5%.
Analysts and portfolio managers said the move in Treasury yields has been orderly rather than sudden. The selloff in Treasuries began around the Fed’s July policy meeting and, so far, has not shown signs of turning into a disorderly market move, according to analysts cited by Reuters. Strong US corporate earnings are also helping keep bond-market volatility under control, according to Victoria Fernandez, chief market strategist and fixed-income portfolio manager at Crossmark Global Investments. Fernandez said strong company earnings have helped investors feel more comfortable with higher Treasury yields.
Why stronger US growth is keeping volatility low
One reason for the lower volatility is that investors are increasingly focused on a stronger US economy rather than only on concerns about government debt and the budget deficit. That could allow Treasury yields to remain at a higher level without moving sharply up or down, which would keep volatility relatively low. In simple terms, investors may be adjusting to higher interest rates instead of reacting to them with panic. However, there is still uncertainty about what the Federal Reserve will do at its next few meetings.
Amrut Nashikkar, head of derivatives strategy at Barclays, said the Treasury selloff is being driven less by worries about demand for US government bonds and more by the stronger economic outlook, according to Reuters. If investors become more certain that the Fed will keep rates higher for a longer period, there may be less uncertainty about the overall direction of monetary policy, analysts said.
That level of expected volatility is much lower than in October 2023, when 10-year Treasury yields last approached 5%. At that time, three-month options were pricing around 134 basis points of volatility, according to Reuters. The difference shows that investors are currently less nervous about the rise in Treasury yields than they were when yields approached the same level in 2023.
