Ask a group of bond traders to list the two or three most important characteristics of the bond market in 1987, and one item will be mentioned by them all: the return of price volatility to the market.
Back in the late 1950s and early 1960s, if the price of a bond moved as much as a quarter of a point in a day it became a point of discussion. But as inflation began to rise in the late 1960s and the oil shocks of 1973 and 1979 occurred, price swings became much more numerous and pronounced.
Then came the tight money policy of the early 1980s, which was necessary to wring inflation out of the economy and which caused short-term rates to rise to 21 percent. Swings of up to 1 1/2 points a day became routine. As rates finally began to recede over the last five years, the violent price gyrations were tempered.
One of the main components of price volatility is uncertainty, and the bond market has had its share of uncertainty in 1987.
In fact, the market took its direction from a slew of different factors over the course of the year: the dollar, inflation fears, the stock market, who would buy Treasury financings, oil prices, the twin deficit problem, the health of the economy, the Persian Gulf. Everything impacted the bond market, and it took its direction from whatever was being highlighted in the news at any given time instead of focusing on the "big picture."
The wildest gyrations occurred Oct. 19-21. As the stock market came thundering down, the bond market initially fell 2 points. When it was realized that the economy could possibly suffer severe damage, and that the Federal Reserve would not be able to maintain its current credit-tightening policy, bond prices reversed themselves and took off like a rocket.
In the process, bond dealers were caught in a short squeeze that propelled prices even higher and at break-neck speed. On the 20th, the Fed announced that they would supply all the credit necessary to avert any financial calamities.
The result was that in a three-day period, bond prices had moved about 11 points and rates had fallen a percentage point. That is the largest move on record over such a short period of time.
Since the crash, we have many volatile days with 1- to 2-point moves. Over the past six months, the average daily volatility of the 30-year T-bond futures contract has risen to 17.8 percent. Earlier in the year, the volatility of that instrument was running between 12 percent and 14 percent.
From an international viewpoint, one idea that is advanced concerning the market volatility is that the United States is no longer recognized as the top economic power in the world.
As this becomes more apparent, there will be a shifting in the world's economic and financial markets. Consequently, this factor is helping to create much of the anxiety in financial circles.
Whatever the reasons, as we enter 1988 it would appear that the many questions that arose in 1987 will carry over into the new year. And volatility should be with us too.