Greenspans transparency cuts bond market volatility

Aug 2 | Updated: Aug 3 2005, 05:30am hrs
Federal Reserve Chairman Alan Greenspans policy of signaling his intentions for interest rates has helped drive down volatility in the bond market to a seven-year low, hurting earnings for trading firms.

Investors expect Treasury prices to rise or fall by no more than 0.85 percentage point in the next 12 months, according to Merrill Lynch & Cos Move Index, which uses options prices to gauge the outlook for bonds. The expected volatility is two-thirds of what it was before Fed policy makers in Washington began giving forward-looking statements on rates in August 2003.

Smaller price swings limit profits and losses. Morgan Stanley, the worlds largest securities firm by market value, said revenue from trading bonds, currencies and commodities fell 28% in the second quarter. Goldman Sachs Group Inc, the third-largest, on June 16 reported its first quarterly profit decline in three years.

Its a slow death by 1,000 cuts, said John Brady, an interest-rate futures broker for Man Financial Inc in Chicago.

With smaller and smaller ranges were seeing fewer and fewer profitable opportunities.

Investors use options, the right to buy or sell an asset, to bet on or guard against fluctuations in Treasuries. Prices for the contracts are based in part on the likelihood that the underlying securitys price will surge or slump. When that risk is low, it contributes less to an options price.