With the holiday season finally over, it’s probably a good time to contemplate the period’s more excessive and illiquid market moves. Among them the rather sudden and acute sell-off in US and UK government bonds. Was it rational?
As the following charts depict, British government bonds ended 2009 with their worst monthly performance since the start of the year.
US Treasury notes, the 10-year yields of which were approaching their highest level since June on Monday, registered the worst sovereign debt performance of 2009 according to Bloomberg:
As far as the UK is concerned, even upbeat manufacturing and lending data was unable to reverse the sell-off in any decisive fashion on Monday. As Reuters reported:
LONDON, Jan 4 (Reuters) – British gilt prices were little changed on Monday despite upbeat manufacturing and lending data as investors assessed the sustainability of sharp price falls during thin trading over the Christmas period. At 1247 GMT the March long gilt future was flat at 114.45 in thin trade on the first trading day of 2010, when most dealers were back after two weeks of thin markets due to the Christmas and New Year holidays.
Meanwhile, Pacific Investment Management, aka bond-fund Pimco, fuelled further jitters after announcing it was planning to cut its holdings of US and UK debt due to the countries’ record borrowing levels.
According to Bloomberg:
Pimco is “more cautious” on corporate bonds and holds fewer mortgage-backed securities than the percentages in the benchmarks it uses to gauge performance, wrote Paul McCulley, a portfolio manager and member of the investment committee, in his 2010 outlook.
The company is also underweight Treasury Inflation Protected Securities, according to the report on Newport Beach, California-based Pimco’s Web site. “This all leaves us with portfolios that appear, more than at other times, to be hugging the benchmarks with no bold positioning,” McCulley wrote. “We’re making a very active decision to run light on risk.”
Which presumably suggests the bond sell-off was justifiable after all?
Related links:
After the decade of debt: A course to chart- FT
Our wall of gilts is casting a long shadow over 2010 - FT
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