US bond market functioning well amid volatility, New York Fed’s Perli says

By Michael S. Derby

NEW YORK (Reuters) – The U.S. bond market is functioning well amid recent volatility and rising yields are being driven more by uncertainty over the economic outlook as opposed to shifting views of monetary policy, the New York Federal Reserve official responsible for implementing monetary policy said on Thursday.

“The Treasury market appears to be functioning smoothly,” Robert Perli, who manages the U.S. central bank’s massive holdings of cash and bonds, said in prepared remarks for a speech to a conference at the regional Fed bank.

“We see no evidence of market dysfunction,” Perli said, adding “this generally means that we can take Treasury prices and their signals as an accurate reflection of the views of market participants.”

With the market holding in amid the churn, Perli said that based on his analysis, a rise in yields, which has not been steady, is not a function of what market participants think about the policy and economic outlook. Instead, they are demanding more compensation to hold securities in a time of high uncertainty, he said.

“Sources of uncertainty abound these days, from questions about the longevity of the recent uptick in growth, to the likelihood of further inflation or disinflation,” Perli said, adding “there is also discussion about the reduced demand relative to the past from buyers who are less price-sensitive – banks, insurance companies, central banks, and pension funds, for example.”

Perli discussed bond yields at a time when the Fed has either finished, or is close to ending its rate hiking campaign, amid ample signs inflation is cooling. But economic growth has remained robust and job markets have been strong, raising questions as to whether more rate hikes might be needed. Markets, however, are now moving to price in rate cuts.