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The Canadian bond market experienced a rare decline in October, with the broad DEX Universe bond index falling 0.43%. It was the first monthly loss since March and only the third one this year. The European sovereign debt crisis once again dominated market activity, with economic developments having much less impact. Investor sentiment swung back and forth between optimism that the Greek insolvency could be contained and pessimism that it could not be resolved and that a credit crisis and economic chaos would follow as consequences.
As a result, the bond markets experienced some of the greatest volatility in memory during October. This was particularly evident in the benchmark 30-year U.S. Treasury bond. Normally, long term bond yields do not move 25 basis points in a month. This month, however, the yield swung between 2.76% and 3.45%, a range of 69 basis points. As can be seen in the chart below, the resultant price changes were unusually large. The volatility was caused, in part, by reduced liquidity in the market as many investors reacted to ongoing headline risk by withdrawing from active trading. And headline risk was abundant, as announcements about the progress of the European debt crisis were frequently contradicted by official statements the very next day.
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