Bond-market volatility plunges ahead of Fed policy decision. What are investors expecting?

By Christine Idzelis

Ending QT would be 'a really positive thing' for rate-sensitive areas of the market, says BlackRock's deputy CIO of global fixed income

Federal Reserve Chair Jerome Powell will hold a press conference on monetary policy on Wednesday at 2:30 p.m. Eastern.

Volatility in the bond market has plunged ahead of the Federal Reserve's policy decision on Wednesday, with investors expecting the Fed to announce another interest-rate cut and then continue down the path of loosening monetary policy.

The ICE BofAML Move Index, a gauge of rate volatility, slid seven straight days through Monday to 66.87, to end at its lowest level since 2021, according to FactSet data. That left the index down around 14% so far in October and on pace for its biggest monthly drop since May.

The market has been "more confident that the Fed is moving toward a more accommodative stance," said Matthew Bartolini, global head of research strategists at State Street Investment Management, in an interview. A hint of even a "split view" at the Fed about whether it may continue to loosen its monetary policy in December risks shaking their confidence and creating some "near-term volatility," he said.

Volatility has dropped as investors expect the Fed to keep cutting interest rates into 2026 amid concern about a softening labor market even as the economy continues to expand. U.S. bonds have broadly rallied this month, particularly at the long end of the Treasury market's yield curve.

The market is widely expecting the Fed to announce Wednesday, after concluding its two-day policy meeting, that it's lowering its benchmark interest rate by a quarter-percentage point to a target range of 3.75% to 4%. By the end of next year, traders in the fed funds futures market see that rate falling to potentially around 3%, according to the CME FedWatch Tool on Tuesday.

"To me, that's a very credible destination for Fed policy," said Russ Brownback, BlackRock's deputy chief investment officer of global fixed income, by phone. Based in part on his view that inflation will ease to around 2.5% by the end of 2026, he said that a policy rate of 3% by that time may be close to "neutral," so no longer restrictive yet not accommodative to the economy.

While some may worry tariffs risk becoming broadly inflationary, Brownback doesn't see it that way and described the U.S. inflation report released last Friday as "benign." He said that he'll be watching on Wednesday for how the Fed's internal debate about rate cuts and the impact of tariffs on inflation manifests in its policy statement, expected at 2 p.m. Eastern.

Shortly after that on Wednesday, Fed Chair Jerome Powell will host a press conference on monetary policy at 2:30 p.m.

In Brownback's view, "one-off" prices increases in goods due to tariffs won't become inflationary, rather they may create "demand destruction" that leads to disinflation next year. Overall, "the trend line is down" for inflation, he said, pointing to "disinflating forces" in areas like shelter.

Also, "we live in a world where productivity enhancements are exploding, and it's inherently disinflationary," he added.

The U.S. may see robust economic growth "even though we aren't adding jobs," according Brownback. While it's unusual to see such a dynamic over a prolonged period, a "significant productivity story" is underway, with companies investing to grow and getting results without necessarily adding workers, he said.

Today, that's happening as generative artificial intelligence proliferates, said Brownback, who is watching the current corporate earnings season for signs of how companies beyond Big Tech may be incorporating it, potentially via software or AI-enabled robotics, to become more efficient.

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The macroeconomic environment is "very favorable" for investors to pick up yield "in a diversified way in fixed income by owning corporate credit and securitized assets," Brownback said. Broadly speaking, credit markets are "very solid fundamentally," he said.

Still, Brownback sees "pockets of dispersion" in some rate-sensitive parts of the economy, such as housing or areas in which people with lower incomes and wealth might spend or borrow. Investors have to be careful to avoid vulnerable areas within credit even if the overall growth picture looks good, he said.

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Flows this month into exchange-traded funds that target fixed income reflect a "growth bias" on the part of investors as they're seeking exposure to credit markets - including riskier corners of it, like high-yield corporate bonds, which are rated below investment grade, according to Bartolini.

Such positioning "resonates with the Fed lowering interest rates," as that reduces borrowing costs for companies and helps take pressure off more vulnerable businesses in particular, he said.

Brownback told MarketWatch that he's finding opportunities in high-yield corporate bonds as well as securitized debt such as non-agency mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities.

He expects that the Fed may signal Wednesday that it plans to end its program of quantitative tightening, or the reduction of its balance sheet.

Brownback will be looking for how quickly the Fed might stop QT and what that may mean for the mix of Treasurys and mortgage-backed securities on its balance sheet. "The cessation of balance-sheet runoff will be a really positive thing" for rate-sensitive sectors of markets and economy, he said.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y fell 1.2 basis points on Tuesday to 3.982%, just slightly above its 52-week low hit Oct. 22, according to Dow Jones Market Data. The 2-year Treasury yield BX:TMUBMUSD02Y, which is sensitive to the path of the Fed's policy rate, was nearly flat at 3.493%.

-Christine Idzelis

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10-28-25 1837ET