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Recession Risk Can Only Revive Bond Volatility

Admin || 14th January 2026

Bond market volatility has fallen to levels that are approaching quarter-century lows associated with either zero-rate lethargy or sudden spikes. That’s likely to last until dual-sided risks for the Federal Reserve’s mandate become one-sided. Ultimately, recession risks are more dangerous than inflation ones.

Looking back at past catalysts for spikes, they all fall into the category of potential recession-provoking events, whether long-term yields were rising or falling. The Long-Term Capital Management crisis was the first in 1998, the popped tech bubble the second, the Great Financial Crisis the third, the pandemic the fourth and the Fed rate hike train the last.

Arguably, 10-year Treasury yields have been trading in a tight range mostly between 4.00% and 4.20% because of the balanced risks the Federal Reserve keeps talking about. They’ve only broken out of that range to the downside on recession risks during the government shutdown and marginally at the end of November.

As 2026 begins with tax cuts, trade uncertainty fading, continued AI spending and a bevy of other economic supports, the risks seem skewed toward the Fed’s inflation mandate being offside. That favors continued low volatility given past spikes have been all associated with recessions and recession risk.

A lot of us are left scratching our heads on why markets barely react to the quickening pace of extreme geopolitical news. But declining bond market volatility promotes the ‘nickels-in-front-of-steamroller’ approach that Long-Term Capital Management took leading to that first volatility spike -- which, due to immense leverage, was effectively selling vol. And that strategy works until it doesn’t.

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