Oil price turnaround helps fuel bond volatility

Bond market volatility surged as a rebound in commodity prices tempered the deflationary concerns that had sent sovereign securities to their strongest rally in six years.

Price swings of Treasuries, as measured by Bank of America Merrill Lynch’s MOVE Index, jumped 5.2 percent to 92.74 on Tuesday, the highest since October.

Fluctuations of Australian and Japanese 10-year bond futures climbed Wednesday to their highest in more than a year and a half, data on 30-day historical volatility shows.

Bond yields plunged last month as consumer prices tumbled in Europe, China’s economy showed signs of faltering and central banks around the world stepped up stimuli to head off the specter of deflation.

Optimism that Greece will remain in the euro area and a rally in crude oil prices this week turned around bond markets and drove up yields. Australia’s 10-year bond yield rose by the most in 19 months Wednesday to more than erase the previous day’s plunge to a record after the Reserve Bank of Australia (RBA) unexpectedly cut borrowing costs.

“The combination of oil coming up, yields going higher and the unexpected RBA cut all lead toward higher volatility scenarios,” said John Gorman, head of dollar interest-rate trading for Asia-Pacific at Nomura Holdings in Tokyo. ’“A lot of it has to do with what people think about inflation going forward. We’ve seen oil come back up a bit and that lessens the disinflation fears.”

Treasuries fell, extending Tuesday’s biggest rout in 14 months, with the benchmark 10-year yield climbing two basis points to 1.81 percent as of 1:45 p.m. in Tokyo, according to Bloomberg Bond Trader prices.

Australia’s 10-year yield rose 18 basis points to 2.46 percent after declining to an unprecedented 2.25 percent Tuesday. Japan’s yield of similar maturity rose two basis points to 0.375 percent after plunging to a record low of 0.195 percent on Jan. 20.

Greece withdrew its call for a borrowing writedown and outlined plans for a debt exchange, assuaging concerns that the nation would exit the euro.

Oil staged the biggest four-day rally since January 2009 before declining Wednesday.

The volume of Treasuries traded through ICAP Plc, the largest inter-dealer of U.S. government debt, has averaged $317 billion a day since the beginning of November, down from $334 billion daily in the preceding 10 months.

“Whenever there’s volatility in the market, it makes it harder to trade,” Gorman said. “The market moves around a little bit more and liquidity could be less.”

Bloomberg