Look Out: Treasury Volatility May Not Be Over

Rising interest rates, inflation, bank failures—these and other factors have sent Treasury bonds on a wild ride this year, with the biggest swings for the two-year note. While volatility has abated a bit lately, more turbulence may well recur, according to Bank of America analysts.

Reason: The troubling influences have not gone away. In fact, the looming showdown in Washington over the federal debt ceiling—which threatens to produce a default on the country’s debt—could make Treasury paper go wild again.

Brian Moynihan, BofA’s CEO, warned on CNN that a U.S. Treasury default is possible and would have dire consequences, with yields spiraling. Even if a default does not happen, bank analysts believe other forces could push yields up again. In one scenario, BofA analysts speculated that stubborn inflation and continued economic growth could pump the two-year Treasury note over 5% again.

The two-year note had the highest volatility in history in mid-March, according to the Bespoke Investment Group. Overall, the ICE BofA MOVE Index, covering the range of Treasury paper, hit a 15-year high last month.

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In March, the two-year yield breached the 5% mark, a full percentage point greater than the 10-year, which is the benchmark for longer-term debt. Then the two-year, emblematic of short-term rates affected by the Federal Reserve, quickly tumbled to around 4%, just a half-point spread from the 10-year.

This has all been a trial for hedge funds that bet on yields continuing to climb.

Bad call.

Well-known trader Adam Levinson is closing his hedge fund, Graticule Asia, due to losses from ongoing bond market volatility. The fund lost more than 25% in the first two and a half months of the year.

The case for ever-rising rates is not good. The betting on the futures market is that the Fed is almost done with rate hiking and, by year-end, actually will cut rates. Propelling that narrative is that inflation appears to be on the downswing: The Personal Consumption Expenditures Price Index, the Fed’s favorite inflation gauge, rose 5% for the 12 months that ended in February, lower than the downwardly revised 5.3% gain from the end of January.

While that is nowhere near the Fed’s PCE goal of 2%, it does give encouragement to those who believe inflation is on the wane, and thus the need for the central bank to keep on hiking rates is weakening.

All this is taking place amid an inverted yield curve, which has long portended an impending recession. The two-year Treasury yield has been higher than the 10-year yield since last July amid the Fed’s tightening campaign.

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Tags: 10-Year Treasury, Adam Levinson, Bespoke Investment Group, debt ceiling, Inflation, Inverted Yield Curve, PCE, Two-year Treasury, Volatility

The C$247.2 billion ($182.9 billion) Ontario Teachers’ Pension Plan’s board announced it has agreed to acquire majority stakes in an Idaho-based renewable energy firm and an Australian family farm.

The OTTP agreed to acquire a majority stake in Sevana Bioenergy LLC and make a capital commitment of $250 million as part of a plan to develop renewable natural gas projects in North America.

Sevana, founded in 2017 by CEO John McKinney, develops and upgrades large-scale biogas projects that aim to increase the production and use of RNG through the reduction of organic waste. The company has dairy and organics projects in agricultural regions of Oregon, Idaho and South Dakota.

Sevana’s projects are intended to capture methane emissions from farm animals and other organic waste and use them to produce low-carbon renewable power and RNG to replace fossil fuel energy sources. The company said it has a “deep pipeline” of projects, while it is also actively considering acquisitions in the U.S.

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“We are pleased to partner with John and the Sevana team to help accelerate their efforts to develop advanced digester facilities that produce RNG and electricity for transportation fuel, EV charging and other forms of energy,” Zvi Orvitz, OTPP’s senior managing director of private capital for sustainability and energy transition, said in a release. “Sevana has a demonstrated track record of success in the implementation of cutting edge RNG facilities, and we are excited by the opportunity to further scale the company as it enters its next chapter of growth.”

Steve Compton, president of Sevana Bioenergy, said in a release that the Canadian pension fund’s investment “accelerates development of our industry leading projects that contribute direct economic and sustainable benefits to local communities and reduce greenhouse gases.”

According to the OTPP, the Sevana investment falls under the sustainability and energy transition sector and is intended to be used toward its goal to reach net-zero greenhouse-gas emissions by 2050.

The pension fund, through its Australian agriculture subsidiary AustOn Corp. Pty. Ltd., also announced that it acquired a majority equity interest in Mitolo Family Farms, located in Virginia, Australia. Although the OTPP will own a majority of the company’s equity, it said the Mitolo family, which founded the farm in 1972, will retain “a significant ownership stake.”

According to the OTPP, said Mitolo Family Farms will continue to operate under the current brand and the leadership of its managing director, Frank Mitol,o, as well as the current executive leadership team, which includes John Mitolo and Darren Mitolo.

AustOn, which was created in 2018, manages Aroona Farms, which produces almonds in South Australia and Victoria; Jasper Farms, which produces avocados in Western Australia; and Pomona Valley, which produces apples and stone fruit in Victoria.

“The next steps in our growth trajectory will require additional capital to enter into new markets and pursue strategies that will help us profitably respond to emerging trends in agriculture and food manufacturing,” Frank Mitolo said in a release. “The family realized that the additional capital would require partnering with the right investor who understands the cyclical and long-term nature of agriculture, and we believe Ontario Teachers’ is the ideal partner with which to take the business forward.”