Price Volatility Has Gone
Price volatility has left the bond market. Volatility not only measures the change in price of bonds, but also the depth and breadth of that change. The volatility on 30-year Treasury bonds is currently around 7.50 percent, down from the 22 percent to 24 percent level incurred in 1986.</br></br>Another good measure of volatility is the change in yield levels in the different bond sectors over the past several years. By checking the change from the high yield to the low yield in a particular year, one can determine a measure of the volatility in that sector. The change in price is reflected in the change in yield.</br></br>The yield swings in 30-year Treasury bonds, from high to low, have been as follows: 1982, 421 basis points; 1983, 170 basis points; 1984, 245 basis points; 1985, 258 basis points; 1986, 239 basis points, and so far in 1987, a mere 33 basis points. At the beginning of 1987, the yield on the 30-year was 7.39 percent, and it now stands at 7.50 percent, a spread of only 11 basis points. Similiar yield swings existed in the municipal market over the same years.</br></br>There are several reasons why volatility has been squeezed out of the bond markets. Perhaps the most important factor is the diminished role of the Federal Reserve in the Treasury market. In the past, most fixed-income investors have looked for guidance by attempting to perceive the Fed's monetary policy. Economic data was closely monitored to see how it would influence the Fed's policy, while the federal funds rate was scrutinized as a true indicator of the Fed's intent.</br></br>In the past, the Fed would ease credit to stimulate the economy, but now it is perceived that the economy will largely improve through the reduction of the trade deficit.