Keep connected
Our investment management team is made up of engaged thought leaders. Get their latest commentary and stay informed of their frequent media interviews, all delivered to your inbox.
The old Chinese curse is “May you live in interesting times.” Yesterday was certainly interesting, with remarkable volatility in bonds, as well as equities.
The US Treasury market experienced what appeared to be panic type buying in the morning. A very sharp run up in prices saw 30-year Treasuries trade 5 points higher than the previous day’s close. The trading pattern suggested one very large investor had to get out of a losing position, whatever the cost. Much of the buying occurred through the futures market, as dealers reported relatively light trades in the cash market. The jump in Treasury prices, though, caused global government bond prices, including those of Canada, to move sharply higher too. Over the balance of the day, bond prices retreated, giving up most of the morning’s gains.
The catalyst for the volatility was some moderately weaker U.S. economic data that caused a sharp selloff in equity markets. As well, concerns about the Ebola virus and European economies possibly falling back into recessions helped produce a flight to safety bid for bonds. Rumours also circulated that continued large withdrawals from PIMCO were causing unwinds of their positions in illiquid market conditions.
Taking a longer term view, yesterday’s market action was reminiscent of the 1998 Long Term Capital Management fiasco. Then, as now, the real economy in both Canada and the United States continued to perform well. (For example, this morning US jobless claims fell to the lowest level since April 2000, industrial production increased more than expected, and capacity utilization rose to the highest level in 6 years.) What has been happening is a market event as opposed to an economic event. Investors should remember Paul Samuelson’s cautionary remark that the stock market has predicted 9 of the last 5 recessions. The stock markets are in the midst of an overdue correction in a longer term bull market. That is not a fundamental reason to be bullish on bonds over the long term.
Our bond funds remain defensively positioned with durations less than their respective benchmarks.