Market Insider

The bond market hasn't behaved this way since the Ford Mustang was new

Key Points
  • The distance between the high and low yield of the 10-year Treasury this year is the narrowest it's been since 1965, when it was just a half a point.
  • This week's jump in 10-year yields to nearly 2.50 percent feels like a sharp move, because it was — relative to the recent trading range.
  • The difference between the 10-year's high and low yield this year has been 0.59.
  • Strategists say the low volatility trade should end as central banks raise rates and step back from easing programs.

The quiet moves in the Treasury market this year have a lot in common with conditions in 1965.

Both years had unusually low volatility. In 1965, the difference between the closing high and low yields on the benchmark 10-year Treasury was only half a percentage point. This year, the gap is only 0.59 points, between the 2.63 percent closing high of March and 2.04 percent closing low of September.

1964 Ford Mustang
Matt Writtle | Barcroft | Getty Images

"That's remarkable. The market has just been dead," said Wells Fargo head rate strategist Michael Schumacher, who studied the spreads and provided CNBC with the data.

But the bond market woke up a bit this week, with yields ripping higher, amid talk of bigger U.S. deficits, more government debt, and Fed rate hikes. The 10-year yield has moved more than 13 basis points in three days and was at 2.49 percent Wednesday. The 10-year is key because its yield affects the rates of mortgages and other consumer and business loans.

"You have to look at a 13-odd basis point move in a couple days as being noteworthy," said Schumacher. "It's been a big move if you think about the last 3½ months. We've had a very calm year from Sept. 7 to today. You're up 45 basis points."

There is another similarity with 1965, and that's relatively low inflation, according to David Ader, chief macro strategist at Informa Financial Intelligence. "There's lower volatility when inflation is steady."

CPI in 1965 was less than 2 percent and rose slightly into the end of the year, and CPI for this October was just 2 percent year over year. The PCE deflator, an indicator closely watched by the Fed, is an even lower 1.5 percent.

Schumacher said the low-to-high spread on the 10-year yield in 2016 was bigger — with a 1.24 percentage point range. Markets absorbed a couple of surprises, including the U.K.'s vote to leave the European Union and the election of Donald Trump.

"It was Brexit to Trump last year. That was a pretty big deal," he said but added that recent years have been relatively quiet, too.

"It's been calmer than normal in the last couple of years," he said. "It would make sense that the Fed and central banks squashed volatility. It would make sense if the central banks backed away, volatility would go up."

Ader also warned that the Treasury market has been lulled by easy Fed policy, but the Fed is on a path to continue raising interest rates and further reduce its bond purchases. The European Central Bank is also cutting its bond purchases in half, starting in January.

Schumacher said it's unlikely that the range will be so low again in 2018, given the fact more rate hikes are coming and the Fed is winding down its bond buying. "We're at a 50-year low," and while it's unlikely, "I guess you could fall out of a basement," he said.

The bond market wasn't quite the same in some ways in 1965, when Lyndon Johnson was president and the nation was at war in Vietnam. Interest rates were much higher, with the 10-year yield ending the year at 4.65 percent. Its low close was 4.17 percent, and its high was 4.67 percent.

As for the Mustang, Ford officially unveiled it at the 1964 New York World's Fair.

Consumer Price Index 1963-1966 

Source: Informa Financial Intelligence