Government bond traders are no strangers to periods of intense volatility, only to be followed by virtually dead calm. The start of 2020 witnessed one of the most volatile trading periods in many years, as rates for the 10-year Treasury bonds tumbled from 1.70% in January to a an all-time low of 0.5% in March as the pandemic fears, initially, toppled the equity markets. The Bank of America’s US Treasury volatility index reached a decade high in March, but is now near a record low. Overall, long bond holders recorded gains 10% for the first half of the year, but now worry about the implications of a very calm market. It is as if the bond market has become stuck into a very narrow trading range, making it more difficult to provide traders with an edge. Volatility is a trader’s friend. So, bond yields in the doldrums leads to lots of speculation as to future trading profits.

One explanation advanced as to why the market is so calm is whether the US Treasury market will be subject to yield curve control, similar to that practiced in Japan. For several years, the Bank of Japan has explicitly set a target for the 10-year government bond at 0.0% and stands by to purchase or sell bonds to ensure that yield prevails. This is in support of fiscal policy that allows the central government to borrow interest- free over the long term. So far, the Fed has not indicated that it has adopted such an approach, although it has indicated that it will maintain the current Fed funds rate until 2022, implicitly supporting Treasuries efforts to float as much debt as is needed at very low interest rates.

After chalking record trading profits for the first- half, Wall Street is girding for big slow-down in its capital markets activities for the remainder of the year. JP Morgan anticipates trading revenues to drop by half for the remaining two quarters. The firm has become more pessimistic since April, hence the increase in potential loan losses. JP Morgan has examined five different scenarios for the second half and, freely, admits the bank is ‘flying blind’. Thus, another explanation is that the bond market seems stalled with no firm conviction regarding the future path of the economy. So, at this point, the outlook is very murky indeed, and bond market participants are just sitting on the sidelines not exactly sure how position themselves in such an environment. Rest assured, markets will not remain stagnant for long.