U.S. Treasury Volatility Rises as Policy Doubts Roil Markets

By Xu Chao, The Wall Street Journal The U.S. Treasury market is sending increasingly forceful stress signals across asset classes, with equities starting to feel the strain first. Long-dated Treasury yields jumped last week: the 30-year yield climbed to its highest level since 2007, and the 10-year yield broke above the range it had held since late 2023. Measures of rate volatility and downside hedging have also accelerated. The ICE Bank of America MOVE Index, a widely watched gauge of expected Treasury volatility, rose to its highest level since May as demand surged for put options that profit from falling bond prices. Chicago Board Options Exchange data show the one-month put skew on the iShares 20+ Year U.S. Treasury Bond ETF (TLT) hit its highest level since the 2008 financial crisis. Attention now turns to a potentially market-moving week ahead. The Treasury is set to release details of its financing plan, and Friday's July nonfarm payrolls report is due, both of which could amplify bond-market swings. Bob Elliott of Unlimited Funds said it is becoming harder to assess how long other markets, including stocks, can hold up at current rates without being pulled lower. TD Securities' Gennadiy Goldberg, head of U.S. rates strategy, warned that conditions are fragile as uncertainty over the Federal Reserve's guidance collides with other sources of market noise, including geopolitical risks. He argued that long-term yields are breaking higher as investors scrutinize the Fed's credibility. At the center of the latest move is growing skepticism about the Fed's policy resolve. Since Kevin Warsh took over leadership at the Federal Reserve, he has maintained a tough anti-inflation posture. Inflation, though, has remained above the Fed's 2% target for five consecutive years, prompting investors to question whether policymakers would truly be willing to raise rates again. Last Wednesday's Fed meeting also produced an unusually sharp internal split: three regional Fed presidents voted for a rate hike against the committee's majority. After Warsh wrapped up the press conference, long-term yields rose while short-term yields fell, sharply compressing the curve. Dow Jones Market Data said it was the biggest "Fed meeting day" yield-curve compression since 2023. Goldberg said markets are increasingly questioning how committed the Fed is to bringing inflation under control. Under his base case, he does not expect rate hikes this year or next, but he added that the probability of hikes has "significantly increased." Volatility is spilling into derivatives markets and boosting hedging demand. The MOVE Index surge signals that traders are actively guarding against the risk of further rate increases. Put-to-call volume tied to TLT has risen notably, and CBOE analysts highlighted that the one-month TLT put skew has jumped to levels last seen during the 2008 crisis. This rise in long-term yields is also notable for its disconnect from oil. Oil prices have fallen rather than rising alongside yields, weakening the usual relationship between the two and adding to uncertainty. Market participants are increasingly focused on potential spillovers into equities. Historically, bouts of Treasury turmoil have often preceded stress in stock markets. Elliott said that when Treasury yields reach or approach current levels, pressure frequently begins to spread to other assets, with equities typically reacting first. The 30-year Treasury yield has reached 5.239% and the 10-year yield stands at 4.693%, both near historically elevated ranges. Goldberg said geopolitical uncertainty linked to Iran, unclear Fed guidance, and other overlapping crosscurrents are combining into an unusually precarious backdrop. "Various uncertainties are intertwining," he said. The week ahead could be decisive in determining whether the Treasury market's pressure intensifies and broadens. The Treasury's updated borrowing plan could surprise markets and reignite volatility, while a series of economic releases culminating in Friday's July jobs report will shape expectations for the Fed's policy path. Separately, the U.S. Treasury last week joined the Federal Reserve and Japanese authorities in a historic coordinated intervention aimed at stabilizing the yen after a sustained decline. Analysts say U.S. involvement was partly intended to prevent renewed turbulence in the Treasury market. At roughly $30 trillion, the U.S. Treasury market is a cornerstone of the global financial system. It serves as key collateral for short-term institutional funding and as the benchmark pricing anchor for trillions of dollars of global debt. If this "sleeping giant" remains unsettled, the effects are likely to extend well beyond bonds.