Treasury volatility drops

Treasury market volatility was almost the lowest in two years before Federal Reserve Chair Janet Yellen resumes testimony to lawmakers after saying yesterday monetary stimulus is still required.

The difference between five- and 30-year yields narrowed to the least in a week after Yellen pointed to “significant slack” in labor markets and said interest rates were likely to stay low for a considerable period after bond purchases end. Economists predict a central bank report will show industrial production growth slowed in June.

“People have been living on pledges of the uber-doves to keep rates low,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “She indicated things are better than expected. She still couched it by talking about risks.”

The U.S. 10-year yield rose one basis point, or 0.01 percentage point, to 2.56 percent at 9:17 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due in May 2024 was at 99 1/2.

Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, fell for a third day yesterday, declining to 54.03 basis points from 54.42. It dropped to 52.74 on June 30, the lowest since May 2013. The gauge has averaged 91.7 during the past decade.

Price swings

Volatility across asset classes has tumbled this year as central banks around the world pledged to keep interest rates lower for longer to support the economic recovery. Those same policies are also underpinning demand for fixed-income securities even as they stimulate growth.

The Bloomberg Global Developed Sovereign Bond Index returned 4.7 percent this year through yesterday, recouping last year’s loss of 4.6 percent, while Bank of America Corp.’s Market Risk Index, which uses options to forecast fluctuations in equities, currencies, commodities and bonds fell to its lowest level since at least 2000 this month.

“A high degree of monetary policy accommodation remains appropriate,” Yellen said yesterday in her semi-annual testimony prepared for delivery to the Senate Banking Committee. “Although the economy continues to improve, the recovery is not yet complete.”

Signs of labor-market slack include slow wage growth and low labor-force participation, she said. Yellen will speak before the House Financial Services Committee today.

Fed view

“The market thinks the Fed is going to be striking the same tone for some time to come,” said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. “It doesn’t give the market enough impetus to start to sell off.”

The yield spread between five-year notes and 30-year bonds, known as the yield curve, shrank as low as 166 basis points, after contracting to 164 on July 9, the least since March 2009.

Shorter maturities are more sensitive to what the Fed does with interest rates, while longer-dated debt is more influenced by the outlook for inflation.

Industrial production climbed 0.2 percent in June, capping the strongest quarter in almost four years and indicating manufacturers are providing a bigger spark for the U.S. economy.

The gain in output at factories, mines and utilities last month followed a revised 0.5 percent advance in May, figures from the Fed showed. The median forecast in a Bloomberg survey of economists called for a 0.3 percent advance.

The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, climbed to $342 billion yesterday, from $159 billion the previous day. The daily average volume this year is $332 billion.

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