Treasuries have dozed off for the summer: Mike Dolan
LONDON - The Treasury market appears to have nodded off while the stock market cruises at record highs. It may just be the summer doldrums, but it's a head-scratcher for investors who've fretted about a looming bust-up in both. The implementation of U.S. President Donald Trump's tariff sweep last week - which markets had obsessed about for months - was a non-event in the financial world.
While the true fallout has arguably yet to play out and could well take the form of a slow burn over time, nothing resembling April's shock has unfolded in markets.
Perhaps the outstanding metric of the moment is Treasury bond volatility, or the lack thereof. For all the outsized fears about the U.S. fiscal situation, climbing debt loads, tariff-related inflation and Federal Reserve independence, the bond market's "fear index" is at its lowest point in three years. The MOVE index, which captures implied volatility across the Treasury spectrum, has plummeted since peaking in April, slipping to about half of where it was after the "Liberation Day" markets blowout. It's also below its 20-year average, two decades that were largely defined by paltry inflation and massive Federal Reserve bond buying.
And, ironically, this stasis can create its own positive energy.
For one, subdued Treasury volatility can reduce so-called "haircuts" in securities lending because the lower the level of volatility - and hence the lower the implied risk - the more cash an investor can borrow when Treasuries are posted as collateral in repurchase deals.
That, in turn, can help loosen financial conditions at the margins, regardless of nominal borrowing rates per se. Indeed, that's likely already happening. Broad financial conditions indexes are the loosest they've been since early 2022, thanks also to record-high equity markets, narrow credit spreads and low energy prices.
HARD TO SHAKE
And looking at the seemingly frozen government bond market through a fundamental lens gives it a relatively benign gloss.
U.S. interest rates look set to resume falling, but not because of a recession that could force the Fed to slash them quickly, so there's little risk of the type of bond volatility spike seen during the brief banking crisis of March 2023, for example.
The debt worries that intensified around the passage of the recent "One Big Beautiful Bill" have been partially neutralized by both Fed easing hopes and speculation that Treasury will simply frontload any additional new debt sales with bills and short notes that benefit most from falling official rates.
Deregulation of the mushrooming universe of stablecoins, digital tokens with fixed dollar exchange rates that are now required to be backed by short-term Treasury bill holdings, are expected to ease that short debt sale focus too.
As to market positioning, the latest Bank of America global funds survey shows that a net 5% of asset managers polled were underweight bonds. While that sounds low, it's still 1.5 standard deviations above long-term averages for the 25-year survey. So any massive shift in allocations seems unlikely.
Few extremes then to fret about, it seems.
If a combination of mounting fiscal fears, a multi-month tariff campaign and a stubborn - or even politically-compromised - Fed can't shake this bond market, then the summer doldrums may be here to stay.
The opinions expressed here are those of the author, a columnist for Reuters
-- Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn. Plus, sign up for my weekday newsletter, Morning Bid U.S.
(by Mike Dolan; editing by Nia Williams)
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