The Bond Market’s Fear Index Has Reawakened From Its Slumber. Brace for Volatility.

(SAUL LOEB / AFP / Getty Images)

The bond market looks like its ready to break out of vacation mode.

A widely used gauge of implied volatility that tracks expected swings in Treasuries, the ICE BofA MOVE Index, had been steadily falling since its peak of 140 in April—and by Thursday, it had collapsed to 79.84, its lowest level in 3½ years. For context, the past five-year average for the index is above 97.

Levels this summer have reflected a bond market that had been yawning despite shifting tariff talks and President Donald Trump’s public criticism of the Federal Reserve. The reading also came on the heels of two Fed governors dissenting Wednesday from the interest-rate decision made by the central bank’s policymaking arm—something that hasn’t happened since 1993.

Volatility may be now ready to show its face.

For one, the Treasury market has broken out of its tight trading range. The yield on the 10-year Treasury note, which largely moved only about 0.05 percentage points in either direction of its 200-day moving average of 4.40% in July, fell to 4.218% on Friday. The drop is notable: That level marks the yield’s biggest one-day decline since April 3.

The yield on the two-year Treasury note marked its largest one-day decline in almost a year on Friday, while the yield on the 30-year note fell 0.081 percentage point.

Yields fall when Treasury prices rise, delivering a windfall to folks already holding existing Treasuries. The weak July jobs report, released Friday morning, also included substantial, lower revisions for May and June job growth—and drove much of the day’s drama. More investors bought Treasuries, haven assets, sending their prices higher.

The MOVE index reflected the shift, rising from 1% early Friday to 5% by the end of the trading day—the index’s largest one-day gain since July 14. When the index gains, it means investors fear a lot of movement in bond yields ahead.

More volatility could be on the horizon, considering the now-prevailing narrative of a labor market that has lost its footing under the pressure of tariffs. Data from the Bureau of Labor Statistics indicates that payroll growth has averaged 35,000 a month over the past three months—the worst numbers since the beginning of the pandemic.

Investors also have to contend with seasonality.

“The recent volatility decay has also been consistent with the historical tendency for volatility to diminish as the summer gets underway,” wrote Ian Lyngen, Head of US Rates Strategy at BMO Capital Markets. “In fact, on average, volatility bottoms for the year in late-July before establishing a trend higher over the coming months, reaching the annual peak in early-October.”

Lyngen sees an increase in volatility over the balance of the summer—and October could be a spooky sight for bond investors. Sit tight for the swings.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com