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What Are Treasury Yields Telling Us About the Market Climate?

Top of Mind: High-credit quality bonds may help defuse sharp interest rate volatility and heightened uncertainty.

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Key Takeaways

Treasury yield volatility has hit unusually high levels, indicating market uncertainty is elevated and widespread.

Banking industry turmoil and tighter financial conditions have increased the likelihood of a recession.

Focusing on high-quality, interest rate-sensitive bonds may help investors mitigate this period of heightened volatility.

Treasury Yield Swings Highlight Market’s Worries

The U.S. Treasury market is usually a good indicator of investors’ economic sentiment. Investors who are upbeat about the economy usually prefer riskier investments, such as stocks. Treasury prices then fall, and yields rise. Conversely, concerns about the economy tend to make Treasuries more attractive, causing their prices to rise and yields to fall.

The banking industry unrest that emerged in March has unleashed some of the wildest swings in U.S. Treasury yields in nearly 15 years. This level of volatility is rare and highlights the market’s confusion surrounding the path for inflation, Federal Reserve (Fed) policy and the economic cycle. We think it also suggests that investors should consider shielding their portfolios with high-quality bonds.

MOVE Index Has Signaled Past Recessions

Since mid-March, the ICE BofA MOVE Index,1 a popular measure of bond market volatility, has surged. Figure 1 tracks the Treasury market’s movements from 2000 through early April 2023.

Figure 1 | Treasury Volatility Surges as Uncertainty Soars

Line chart showing the Index level of the ICE BofA MOVE Index from December 1999 through April 2023. The ICE BofA MOVE Index has surged since mid-March 2023.

Data from 12/31/1999 – 4/7/2023. Source: FactSet.

As the chart illustrates, the last time the Treasury market experienced such protracted volatility was in 2008, after the collapse of Lehman Brothers. Before that, bond market volatility escalated in the period following the 9/11 terrorist attacks. It’s important to note that these events also coincided with the last two sustained U.S. economic recessions.

Even during the depths of the COVID-19 pandemic, the MOVE Index only hit recent levels for a single day — March 9, 2020.

Short-Maturity Treasury Yields Haven’t Dropped So Much in 40 Years

The recent fluctuations were particularly severe among two-year Treasury yields. Following the collapse of Silicon Valley Bank and Signature Bank, the two-year Treasury yield plunged 1 percentage point over three days. Such a move hadn’t occurred since 1982.

Yields trended upward by the end of March, only to sink and soar again in early April.

Before March, volatility among two-year Treasury yields was relatively tame. Market participants generally expected short-maturity rates to climb until inflation eased and the Fed halted its rate-hike cycle. But the bank failures quickly disrupted the largely predictable interest rate outlook.

Amid the heightened uncertainty, many investors rushed to the perceived safety of Treasury securities. Those expecting higher rates quickly repositioned their strategies to stem losses. This action pushed Treasury yields sharply lower and prices notably higher across maturities.

Defensive Positioning May Mitigate Uncertainties

Amplified volatility in the Treasury market reflects the heightened level of uncertainty in today’s economy. The emergence of banking industry unrest represents a wild card, challenging prior expectations for inflation and Fed policy, the economy’s trajectory and market performance. Tighter bank lending standards may trigger a credit crunch, which could accelerate the economy’s decline.

High-Quality Bonds May Help Calm Market Unrest

We believe the recent MOVE Index movements underscore the importance of securing portfolio protection. In our view, today’s fixed-income market offers opportunities to help temper volatility in diversified investment portfolios.

Historically, high-credit-quality bonds have helped investors mitigate equity market volatility. Bonds — particularly those subject to lower levels of credit risk — generally experience fewer price swings than stocks. This can help smooth out the effects of choppy equity markets in your asset allocation strategy.

While the yield environment has been volatile, it’s also important to note that bond yields are notably higher than they’ve been in many years. The extended period of elevated inflation and Fed tightening has pushed bond yields — and the corresponding income potential — to their highest levels in nearly 15 years. Figure 2 highlights this dynamic.

Figure 2 | Bond Yields Reach Multiyear Highs

Line chart demonstrating that bonds currently offer the highest yields in nearly 15 years. The chart compares Bloomberg U.S. Corporate Index, Bloomberg U.S. MBS Index, and U.S. Benchmark Bond 2 year and 10 year.

Data from 2/28/2003 – 2/28/2023. Source: FactSet. Past performance is no guarantee of future results.

Duration May Offer Value as Recession Risk Rises

We believe the economy will slip into recession in the coming quarters. We have expected significantly tighter financial conditions and still-high inflation to trigger an economic slowdown. Now, stricter lending standards due to banking industry turmoil mean a deeper downturn is possible.

As recession takes hold, yields on high-quality bonds, including longer-maturity Treasuries, should drop. We believe this may lead to additional positive return potential, beyond the yield, for high-quality bonds with longer durations.

Stay Disciplined and Centered on Your Long-Term Goals

We believe focusing on higher-quality securities is prudent, particularly as recession risk is growing. In our view, U.S. Treasuries and higher-credit-quality corporate and securitized bonds have offered income and total return potential to help investors weather a recession. In addition, extending duration may deliver value, as interest rates typically fall as recession appears imminent.

As in all periods of market uncertainty, we encourage you to remain disciplined and focused on your long-term investment goals. Investing across multiple asset classes and focusing on risk management remain important strategies in the current market climate.

It’s also important to remember that attractive investment opportunities often emerge during market unrest. We suggest investing with experienced professionals with the insights and discipline to recognize and potentially capitalize on such prospects.

John Lovito
John Lovito

Co-Chief Investment Officer

Global Fixed Income

Charles Tan
Charles Tan

Co-Chief Investment Officer

Global Fixed Income

Investing During Market Uncertainty

Explore strategies designed to offer income and attractive risk-adjusted returns.

The ICE BofA MOVE Index is a measure of U.S. interest rate volatility that tracks the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on two-, five-, 10- and 30-year Treasuries.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Investments in fixed income securities are subject to the risks associated with debt securities including credit, price and interest rate risk.

Diversification does not assure a profit nor does it protect against loss of principal.