Fixed Income Volatility

When thinking about fixed income volatility, one must recognize that the curve must be parsed in order to assess ultimate risk. The front end is highly dependent on the overnight target rate set by central banks, the back end is a commodity driven by multiple factors, such as fear, inflation expectations, regulatory regime (ie. UK pension LDI), carry considerations and investor preference. The belly of the curve is pulled by the front & back end considerations with varying degrees of strength.

So when I read a research report that tells me that the Fed has effectively sold puts on the back end by introducing the concept of quantitative easing into their player's manual, I am forced to look back at my post Macro Thoughts It is precisely at times like these, where the breadth of opinion is bifurcated and few sit in the precious middle, that makes for volatile times. Indeed, US 10y bonds found some yield resistance at 3%, and it appears bonds could break by 50bps either way in a very short period of time. Not a great time to be short fixed income volatility in the back end of the curve.

See chart here