Chart of the Week
Since the beginning of the year, investors have been switching from one economic scenario to another: from disinflation to continued inflationary pressures, from recession to reacceleration of growth. After starting the year expecting the Fed to pivot this summer, investors were expecting the Central Bank to continue raising rates beyond 5.25% mentioned in the December forecasts. The problems of some US banks led to a sharp re-evaluation of investors’ expectations, who came to expect a Fed rate cut as early as June.
In this context, fixed income market volatility has been historically high, especially on the short end of the curve. The chart below shows the volatility not of bonds but of rates, which corrects for the fact that longer-maturity bonds have a higher sensitivity, and therefore vary more with the same rate change.
OUR ANALYSIS
At the end of 2022, interest rate volatility was already at one of its highest levels in the last 40 years. Despite this, March saw the volatility of two-year rates rise sharply to a historically high level, similar to that of the last quarter of 2008. It should be noted that this volatility has been much higher than that of 10-year interest rates over the recent period, whereas in 2008, the volatility of long-term interest rates was also exceptional.
Uncertainty about the future of the US economy will undoubtedly keep volatility high, given the signs of still very high inflation, a reacceleration of activity and the gradual effects of the ongoing monetary tightening. If concerns about the U.S. banking sector are quickly resolved, the markets could quickly erase the short rate cuts of March.
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The opinion expressed above is dated March 31, 2023 and is subject to change.
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