Bond Traders Have Forgotten the Taper Tantrum

The Federal Reserve this week is holding its second meeting on monetary policy this year, and the topic dominating the conversation in markets is bond-market volatility. Or more precisely, the lack of it. There are many ways to think about this, but one stands out above the rest in a concerning way.

My Bloomberg Opinion colleague Brian Chappatta notes that the all-important 10-year Treasury note’s yield has fluctuated within a 22-basis-point range since early January, narrower than any calendar-year quarter since 1965. On top of that, expected implied volatility as tracked by Bank of America Corp.’s Move Index just fell to its lowest level since 1988. What this implies is that the bond market has reasserted control over the Fed. In other words, the central bank wouldn’t dare send a hawkish surprise and upset markets unless the bond market was prepared for such an outcome, which it isn’t, as evidenced by the drop in volatility and yields. But the Fed under Chairman Jerome Powell has made it clear that it’s independent and doesn’t take orders from anyone or anything, be it the president or the markets. So with longer-term bond yields back at their lowest since January 2017, the stock market having fully recovered from the December sell-off and financial conditions back to being about as loose as anytime in the past five years, it would be easy for the Fed to deliver a message this week that isn’t as dovish as the market expects to stamp out some of the complacency creeping into asset prices. After all, a Bloomberg survey of economists is forecasting a rate hike this year.