Bonds are extra volatile, but global markets have been taking Ukraine invasion in stride for now

Published Wed, Mar 2 20223:29 PM ESTUpdated Wed, Mar 2 20224:38 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

The usually staid Treasury market has been more volatile than normal since Russia's invasion of Ukraine. However, strategists say global markets are functioning as smoothly as could be expected. Russian assets have been hit especially hard since the invasion began. Russia's stock market has been closed since Monday after plummeting, and the Russian 10-year yield was at 12.9% on Wednesday — up from 9.75% on Feb. 18. The ruble , meanwhile, is down more than 35% against the dollar since last Thursday. Traders say a nagging concern has been the degree to which investors and institutions could be directly or indirectly exposed to Russia. That fear is not pervading markets, but it may have been sending some investors into the safety of the U.S. Treasury market — which has been whipsawed as of late. Since Russia rolled its tanks into neighboring Ukraine last Thursday, the bellwether 10-year Treasury yield has been trading in relatively wide intraday ranges. The volatility continued Wednesday. The yield, which moves opposite price, was at 1.89% on Wednesday afternoon, jumping 18 basis points in its biggest one day move since 2020. It had been at a low of 1.68% Tuesday after swinging to a high of 2.01% on Friday. "This is new times. We're sanctioning a major central bank, and there's a war in Europe. It could cause some defensive positioning that sends ripples through asset prices," John Briggs of NatWest said. Volatile yields The U.S. 10-year is important, since it influences mortgages and other consumer and business loans. It is also the most widely watched Treasury and serves as a metric that expresses the level of fear in markets. Its yield declines when prices rise. Strategists say the volatility is a result of investors positioning around the Ukraine crisis but also reassessing the outlook for interest rates. Interest rate expectations have also made huge moves. As of Tuesday, traders were pricing in between four and five quarter-point rate hikes through the end of this year. That was down from seven previously. But as Federal Reserve Chair Jerome Powell spoke Wednesday morning, fed funds futures for December moved by 28 basis points, adding in another rate hike. That also helped drive the 10-year yield higher. "Powell said he's not going to raise 50 [basis points] in March, but he's still committed to dealing with inflation, and he's not being thrown off because of the invasion," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. European sovereign debt has also made big moves. The yield on the 10-year German bund , for instance, fell back into negative territory Tuesday from 0.22% a week ago, before the invasion. It was 0.02% Wednesday. Improving conditions Despite the heightened uncertainty, there are signs that markets are still operating smoothly. One example of this can be seen in the corporate bond space, where spreads — the difference between yields — widened after news of the invasion before returning to their levels from last Wednesday. Investors interpret tighter spreads as a positive sign for the economy and an indication that credit risk is declining. Conversely, spreads widen during economic tumult. "So far, it seems like conditions have gotten a little better since Monday," said Jim Caron, macro strategist for global fixed income at Morgan Stanley Investment Management. "We're not seeing any major counterparty issue at the moment, but a caveat is that could change day by day," Caron said. Right now, "the markets are opening and functioning. Liquidity is available. The Fed has already established dollar swap lines with other central banks, so dollar funding should not come under stress." Hans Mikkelsen, Wells Fargo global head of credit strategy, said yields on both U.S. investment grade and junk bonds are close to where they were a week ago, after widening on news of the invasion. The spread on the Bloomberg Barclays U.S. Corporate High-Yield Total Return index Wednesday afternoon was 370 basis points, or 3.70 percentage points, above Treasurys. That's nearly the same level it was just before the invasion and the highest since December 2020 — up from 283 at the beginning of the year. Still, spreads between U.S. and European high yield remain wide, Mikkelsen said. "If you look at global credit, we are seeing underperformance in Europe. European high yield is trading 74 basis points wider than U.S. high yield. Normally they're pretty close. It's really gapped out." NatWest's Briggs said there's been some widening of cross-currency swap spreads, "but they're not going crazy." "Swap spreads are moving a little bit. It shows there's a bit of demand for cash, but it doesn't show dysfunction. It's demand for dollars in particular," he said. Bleakley's Boockvar said the markets are not yet showing big concern about the crisis weakening the economy. "It hasn't been dramatic yet. It's not crossing over a line that says growth is going to be challenging here. I think we're heading in that direction but we're not there yet," he said.

Traders on the floor of the NYSE, Feb. 1, 2022.

Source: NYSE

The usually staid Treasury market has been more volatile than normal since Russia's invasion of Ukraine. However, strategists say global markets are functioning as smoothly as could be expected.