BREAKING: U.S. Bond Volatility Players Eye 2021 Inflation Bump

Photo: Reuters

(Reuters) - After a decade of central bank bond buying, fund managers have begun to wonder if there is again money to be made in betting or hedging against volatility in the bond market caused by an economic recovery next year.

The Intercontinental Exchange (ICE) Bank of America (BofA) MOVE Index, which tracks expectations of volatility in Treasuries, is again languishing near all-time lows after a spike in March was quelled by U.S. Federal Reserve intervention.

But a handful of fund managers, and some major banks, warn of the risk of a spike in inflation next year that could spur losses for bond funds and more volatility before the Fed steps back in, or eventually even change the central bank's stance.

As central bank bond purchases suppress rate volatility, investors have turned to markets like stocks and foreign exchange for signals on the macroeconomic outlook.

Wall Street's consensus is that inflation will remain fairly dormant.

U.S. 5-year Treasury Inflation-Protected Securities(TIPS), or inflation-linked bonds, show the anticipated "break-even" rate of inflation in five years at around 1.67%, below the Fed's average target of 2%.

Yields on both 5-year and 10-year TIPS have been firmly in negative territory since March and are currently at -1.31% and -0.92% respectively.

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