The Treasury Volatility Gauge Plummets After Bond Traders Navigate the Election and the Fed

U.S. Treasury yields were stable on Friday, showing minimal fluctuations as the markets reacted to two significant events: Donald Trump’s re-election as U.S. president and a 25-basis-point interest-rate cut by the Federal Reserve. This stability in the yields coincided with a marked drop in volatility, indicating that traders were somewhat reassured following the anticipated outcomes.

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Current Yield Trends

On Friday, the yield on the 2-year Treasury note remained steady at 4.221%, only a slight change from 4.217% on Thursday. Yields, which typically move inversely to bond prices, held close to recent levels as the market digested the week’s major news. Meanwhile, the 10-year Treasury yield declined by 2.8 basis points, moving to 4.313% from 4.341% the previous day. The yield on the 30-year Treasury also dropped, falling 4.2 basis points to reach 4.502%, down from 4.544% on Thursday.

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Key Market Drivers

Two primary events influenced the Treasury market over the past week. First, the U.S. presidential election concluded on Tuesday, with Donald Trump securing another term in office. Markets had anticipated this event with some uncertainty, given the potential implications for trade, fiscal policy, and government spending under a continued Trump administration.

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Secondly, on Thursday, the Federal Reserve announced a 25-basis-point cut in its key interest rate, setting a new target range of 4.50% to 4.75%. These back-to-back developments prompted a measured response from the Treasury market, with traders adjusting their positions while avoiding a major sell-off or rally.

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The ICE BofAML MOVE index, which tracks expected volatility in the Treasury market, fell sharply to around 104.8, reflecting a sense of calm that settled in after the election and Fed announcement. This level marks a substantial decline from the index's position at the beginning of the week, indicating that investor concerns about a volatile reaction to these events were largely unfounded.

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Market Commentary on Volatility

Jim Bianco of Bianco Research shared his perspective on these events through a post on social media platform X. According to Bianco, the bond market initially braced itself for potential turbulence around the election outcome and the Federal Reserve's meeting, but those fears did not materialize. He noted that while volatility has decreased, this doesn’t necessarily signal a forthcoming decline in yields.

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Unlike the Cboe VIX index—which gauges volatility expectations for the S&P 500—there is no correlation between Treasury yields and the MOVE index, which tracks bond market volatility. “Lower volatility is not going to make yields go down,” Bianco explained, highlighting that stability in expected price swings doesn’t inherently influence the direction of yields.

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Earlier in the week, on Wednesday, yields saw an upward push as the bond market digested the implications of a Trump re-election, which some investors interpreted as a signal for policies that might increase the federal deficit or impact trade dynamics.

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On that day, the 2-year Treasury yield rose to 4.266%, marking its highest close since July 31. Longer-term yields, including the 10- and 30-year Treasuries, also reached multi-month highs, closing at 4.425% and 4.602%, respectively. These levels represented the highest yields for these securities since early July, as market participants recalibrated their expectations in light of the renewed Trump administration’s likely policy priorities.

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The following day, however, yields pulled back as the Federal Reserve enacted its anticipated rate cut, lowering its benchmark interest rate by a quarter percentage point. This adjustment shifted the target range for the federal funds rate to 4.50% to 4.75%, a move intended to support the economy by making borrowing costs slightly more favorable. The Fed’s decision came in response to a combination of economic data and a cautious outlook on inflation trends, with the aim of maintaining stable economic growth in a challenging global environment.

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The mixed movements in Treasury yields underscore the complexity of factors influencing U.S. government debt. Despite the Fed’s rate cut, the effects on the bond market remain nuanced, with shorter-term yields more directly influenced by central bank policy shifts. In contrast, longer-term yields often reflect market expectations about future economic growth and inflation.

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The recent yield trajectory suggests that investors are weighing the potential for a continued stable growth environment under Trump’s administration alongside the impact of marginally lower interest rates.

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Looking forward, the Treasury market may experience continued stability, given that major events anticipated by investors—such as the election and the Fed’s policy update—have now passed without sparking significant market disruptions. However, the bond market could see fluctuations based on future policy announcements, economic data releases, and any potential shifts in inflation expectations.

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In conclusion, while the week’s events caused notable market adjustments, U.S. Treasury yields settled into a relatively stable range by Friday. The sharp reduction in volatility, as measured by the MOVE index, reflects a collective sigh of relief among investors who had braced for more uncertainty around the election and the Fed’s policy direction.

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With these events now in the rearview, the Treasury market appears set to navigate upcoming economic indicators with a tempered approach, focusing on long-term trends rather than immediate disruptions.

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