(Bloomberg) -- The turbulence that rattled financial markets earlier this week has vanished from the $30 trillion Treasury market, quashing traders' hopes for a rebound in volatility from historic lows.
The biggest selloff in US government debt so far this year occurred on Tuesday as the US market reopened after a holiday, spurred by a meltdown in Japanese government bonds and a threat by US President Donald Trump to impose tariffs on countries that oppose American control of Greenland. Treasury yields soared to the highest levels in several months.
Chaos, however, was short-lived, and the market's rebound erased most of the weekly move. A surge in gauges of US interest-rate volatility was also brief, with investors anticipating the Federal Reserve will leave rates unchanged at their meeting next week, amid signs of resilience in the economy after last year's three cuts.
"Yields appear to be at equilibrium," said Robert Tipp, chief investment strategist and global head of bonds at PGIM Fixed Income. "The economy is in a good place. There's a good chance the stability we've seen will persist, which would keep volatility low."
Treasury yields were little changed on Friday after failing to respond to gauges of manufacturing and services activity and of consumer sentiment for January. On the week, two- and five-year yields rose slightly, supported by US economic data released Thursday showing resilience in the job market and consumer spending. The data reinforced the trend in market expectations for Fed rate cuts, toward less easing overall.
Longer-maturity yields ended the week little changed to lower, as the forces that had caused them to soar receded. Those included the prospect of global investors losing patience with growing sovereign borrowing needs, with Treasuries in special jeopardy in connection with US aggression in pursuit of control of Greenland.
The 10-year note's yield, near 4.23%, is about one basis points higher on the week. Its weekly changes haven't exceeded six basis points for seven straight weeks. There hasn't been a comparable stretch since mid-2020, when yields were lower than 1%.
Speaking at the World Economic Forum in Davos this week, Citadel CEO Ken Griffin said the fiscally-driven selloff in Japanese government bonds that sent 30-year yields to record levels should serve as an "explicit warning" to US politicians to improve the nation's finances.
Strong demand for an auction of US 20-year bonds on Jan. 21 helped allay those concerns. The US plans to sell two-, five- and seven-year notes next week beginning on Monday.
Financial markets "seem to have been impervious to building geopolitical risks of late," said Mark Dowding, CIO for fixed income at RBC BlueBay. "The economic outlook has not changed much, and yields can resume their sideways trajectory within recent trading ranges."
--With assistance from Greg Ritchie.
(Adds investor comment and updates yield levels.)
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