The bond market is doing something it hasn’t done in 52 years

Volatility in the Treasury market has sunk to a multidecade low, and that could have sweeping implications for the bond market this year.

Treasury volatility as measured by realized volatility in the U.S. 10-year Treasury note has fallen to a 52-year low, according to a new report from Bank of America Merrill Lynch. I believe this is going to open the door to an inverted yield curve, wherein the longer-dated Treasuries carry a lower yield than those that are shorter-dated; this development is classically taken as a troubling signal for the broader market.

Indeed, we have already seen a stunning flattening in the yield curve as measured by the spread between the 10-year and 2-year Treasury yields. Furthermore, the 10-year yield has failed to take its high from the first quarter of 2017, and the 30-year has remained even more contained in its moves.

Ultimately, these long periods of muted moves will lead to a mean reversion. As a futures trader, I watch the Treasury futures, which trade in prices (which move inversely to yields). At this point, I anticipate volatility will pick up in the coming months and that the 30-year Treasury prices will rally at a faster clip than the shorter-end — the 2- and 5-year Treasury yields.

Think about it this way: As prices in the 30-year rise, the yields in the 30-year will sink. As the Federal Reserve tightens monetary policy, the shorter-dated bond yields will go through their own periods of containment. Theoretically, this should encourage the 30-year Treasury yield to fall beneath that of the 2- and 5-year.

So, how should investors position themselves if we are expecting this kind of price action across the bond market?

Investors ought to sell three 5-year Treasury futures contracts for every one 30-year Treasury futures contract bought.


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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