It's usually stock investors who feel the thrill of rising stock prices, and despair when there's a sharp collapse.
For the past two months, however, bond investors have been on a similar roller coaster ride, with volatility at multiyear highs. Treasury yields snapped higher early Tuesday but then fell sharply as investors feared that a contraction in September's ISM manufacturing report meant the manufacturing sector is heading for a recession.
"We're in a situation where the market is debating whether we're on the precipice of recession. Some days we get information that seems to say no, and some days we get information that seems to say yes," said Ralph Axel, Bank of America/Merrill Lynch rates strategist. "The difference between those two answers is a very large range for where rates are going to go."
The 10-year yield Tuesday started the day moving higher, alongside the Japanese 10-year and other global bonds, following a weak auction in Japan. Strategists said it appears the Bank of Japan will buy fewer longer-duration bonds in its quantitative easing program and that could pressure rates higher. Yields, or rates, move opposite of price. The 10-year Japanese government bond has a negative yield, and it rose by 6.5 basis points to negative 0.16%.
Then, in the U.S., ISM manufacturing fell to 47.8% in September, its second month of contraction, and the lowest reading since June 2009. The fear is that readings will continue to come in below 50 — a sign of contraction in the industry — and that the weakness could spread.
The 10-year moved from a high of 1.755% to a low of 1.647%. During a wild period of volatility this summer, the 10-year went to 1.43% on Sept. 3 but then rebounded to as high as 1.9% on Sept. 13. The whole Treasury curve moved with it.
The movements in the bond market are widely watched on Wall Street, but they are ultimately felt on Main Street. The benchmark 10-year yield affects a variety of business and consumer loans, and as it fell in August and into early September, so did the interest rates on home mortgages.
"We've had pretty good moves in the last month," said Michael Schumacher, director, rates strategy at Wells Fargo. "It's been possible to make or lose a lot of money in a hurry. For long-only investors, it's been a pretty good year and they may not want to play much longer."
Schumacher said Tuesday was the 22nd day in 2019 with a 10 basis point or more move in the 10-year yield. In 2018 and 2017, there were just eight such moves in each year. In 2016, however, there were 39 big moves. That was the year of the U.S. presidential election, but also the Brexit vote, after which the 10-year yield fell as low as 1.32%.
Wells Fargo expects the 10-year to be at 1.70% at the end of the year, while Bank of America sees a 1.25% 10-year yield.
Other periods of heightened volatility include 2015, when China devalued its currency; 2013, during the taper tantrum; and 2011, during the European debt crisis.
Axel of Bank of America/Merrill Lynch said the market could continue to be gripped by events beyond the economy. "The level of geopolitical risk is very high," he said, noting such things as the attack on Saudi Arabia's oil production last month, as well as risk from the U.S.-China trade war.
Both strategists said the congressional impeachment process could bring unforeseen risks for markets, and it could affect such things as the normal workings of Washington, including a budget deal.
"Our basic thesis is rates will be choppy for a while and gradually move up," said Wells Fargo's Schumacher. "These moves of 10 to 15 either way ... I don't think they've spooked too many people but they could if they keep going."
The bond rally after the ISM report was probably overdone, he said, but some investors worry weakness in manufacturing could hit the service sector.
"We're not forecasting a recession. But if you start to see ISM declines, steep declines in these things, you really have to consider it," said Shawn Snyder, head of investment strategy at Citi Personal Wealth Management.
As Treasury yields tanked, fed fund futures also had a dramatic move, with expectations for an October rate rising from 42% Monday to 62% after the ISM report, according to the CME Fed Watcher.
In recent weeks, the number of positive economic surprises have risen and recession fears have abated, along with expectations for further Federal Reserve rate cuts.
"Citi's view heading into this is they're probably done with rate cuts for the year, due to inflation ticking higher. If you continue to see downside in this manufacturing data or the services data, then I would expect them to cut again," said Snyder.