Authored by Simon White, Bloomberg macro strategist,

Poor liquidity in the Treasury market is contributing to a rise in implied and realized fixed-income volatility. A re-increase in inflation volatility means this dynamic is likely to persist.

Despite being one of the deepest markets in the world, the market for Treasuries has seen liquidity deteriorate in the years since the pandemic. On several measures – bid/offer spread, order-book depth, price impact of a trade – the Treasury market has shown marked signs of a decline in liquidity in recent years.

Bloomberg’s US Treasury Liquidity Index measures liquidity by comparing where yields are to where they “should” be based off a fitted curve. The greater the average of the yield errors across the curve, the worse liquidity is likely to be.

As the chart below shows, the Liquidity Index infers liquidity has markedly weakened over the last two years, and after showing an improvement over the last six months, it has started to worsen again.

Fixed-income volatility, using the MOVE index, intuitively rises and falls as liquidity worsens and improves respectively.

Bond volatility has been notably higher in this cycle than other assets’ volatility, such as equities and FX. Indeed, the recent rise in the MOVE index, i.e. implied volatility, has taken it to a level above realized volatility it has rarely exceeded in the last 30-plus years.

The immediate catalyst for the rise in bond volatility has been the Federal Reserve’s rate-hiking cycle. But this was itself triggered by the rise in inflation. It is the inherent increase in uncertainty that goes with elevated inflation that is the ultimate source of rising volatility.

Higher inflation volatility goes hand in hand with higher market volatility, especially in rates and fixed-income markets. Inflation is very likely to be persistent, and soon to begin re-accelerating. Inflation volatility has moderated somewhat from its recent highs, but is picking up again.

As long as inflation volatility remains elevated, bond vol will remain likewise. This is even more so the case as the yield curve continues to rise, with steeper curves an inherent source of yield volatility.

Voters in New Zealand on Saturday ousted the party once led by Jacinda Ardern, and have instead elected the country's most conservative government in decades.

Turns out forcing your citizens to take vaccines, decreeing state news the only 'truth,' and locking up peaceful protesters opposed pandemic authoritarianism did not go over well.

On Saturday, conservative Christopher Luxon was elected New Zealand's next prime minister. While the exact makeup of Luxon's government has yet to be determined, his center-right National party looks set to form a coalition government with one or two minor parties.

The National Party will likely combine its indicated 50 seats with the ACT party (11 seats), to give them 61 seats, providing a slim majority in the 121-seat New Zealand parliament. As Goldman notes, the results are largely in line with pre-election polling, with the incumbent Labour party on track to lose their outright majority in parliament for the first time since 2017.

"You have reached for hope and you have voted for change," Luxon told supporters to rapturous applause at an event in Auckland, alongside his wife Amanda and their children.

Outgoing Prime Mininster Chris Hipkins, who's held the job for nine months following the abrupt resignation of Jacinda Ardern, told supporters late Saturday that he'd called Luxon to concede.

Hipkins said that while the result wasn't his desired outcome, "I want you to be proud of what we achieved over the last six years," he told supporters in Wellington.

On the economic front, Goldman notes that Luxon's party has vowed to reduce effective tax rates on incomes and investment parties. And while National has pledged to offset the fiscal impact of tax cuts with savings elsewhere, Goldman sees the risks as "skewed to more stimulatory fiscal policy in 2024" vs New Zealand's current fiscal projections.

The proposed tax cuts and new spending amounts to around 0.8% of annual GDP, which would boost household disposable income by around 1.5% and also provide a tailwind to house prices in 2024. While National has pledged to offset the new spending and lower taxes with a reduction in spending and new taxes, overall we view the risks as skewed to more fiscal stimulus (compared to the current fiscal projections) and additional rate hikes from the RBNZ (GSe: base case on hold at 5.5%).

Luxon has also addressed crime in New Zealand, telling supporters that it's "out of control," adding "And we are going to restore law and order, and we are going to restore personal responsibility."

He's also vowed to fix the capital's traffic woes with a new tunnel project.