Even if the Federal Reserve pulls off a soft landing for the economy as it pivots to rate cuts, volatility in the bond market should still be expected, according to LPL Financial.
History shows that soft landings are a rare feat following a period of Fed rate hikes. It also points to the risk of patches of volatility in the bond market, no matter what happens with the economy.
“As policy adapts to economic conditions, bond market volatility often rises,” Jeffrey Roach, chief economist at LPL Financial, wrote in emailed comments Wednesday.
To bolster the point, he overlaid the “MOVE index,” a measure of implied volatility of Treasury options, with periods of rate changes going back to 1988, which showed that implied volatility rose. “Even during the mid-1990s, when the Fed was able to orchestrate a soft landing, investors dealt with fixed income volatility,” he wrote.