Interest rates have been too low for too long
Since the beginning of the global financial recession, bond markets (AGG) have remained subdued as interest rates in major economies remained close to zero. Central bankers took extraordinary measures to keep interest rates low for extended periods of time. That led to the belief that interest rates would most likely not move any higher, which made bond markets (BND) witness a drastic fall in volatility. In the graph below, you can see the CBOE’s (Chicago Board Options Exchange) ten-year Treasury note (IEF) volatility futures index movement since 2003. The index is constructed to mirror the volatility (VXX) of the ten-year Treasury note. It’s been drifting lower since the beginning of the quantitative easing program in late 2007.
Markets are used to low rates
In normal economic conditions, interest rates and expectations for future interest rates are the key drivers for bond markets. Since the onset of the great recession in 2007, interest rates have remained low, and now the markets are used to low rates. There were instances in the last decade such as the taper tantrum in August 2013 that made bond investors nervous, but that phase of volatility was short-lived. Only recently, bond markets (TLT) started preparing for rate hikes as the Federal Reserve signaled gradual steps toward policy normalization.
In this series, we’ll discuss the outlook for the US and other major bond markets. We’ll also look at possible actions from central bankers and what economic factors could influence these actions.