The market rallies amid uncertainty surrounding US response to terrorist attacks
US Treasuries rallied last week, pushing yields on two-year paper down to their lowest levels since the 1950s.
Following the reopening of bond markets on Thursday, 13 September, investors clamoured to buy the safest securities amid fears concerning the impact last Tuesday's events will have on the equity markets when they re-open. Yields on two-year notes fell by 54 basis points to 2.98% at the close of trading on Thursday, the lowest level since 1958 when Eisenhower was president.
Eddie Middleton, fixed interest fund manager at Britannic Asset Management, said: 'As expected, we have seen an aggressive steepening of the yield curve at the very short end of the market. Investors are anticipating rate cuts and there is a lot of risk aversion, so safe haven money is moving shorter.'
Prices also soared on 10-year notes, which saw a yield squeeze of 21 basis points, falling to 4.63%.
The longer end of the market saw little movement, with 30-year bonds virtually unchanged.
Rod Davidson, investment manager at Aberdeen Asset Management, said the short end rally was exacerbated by the uncertainty surrounding what form the US response to the attacks will be and the pumping of $80bn into the money markets by various central banks to ease liquidity.
Speculation also mounted that the Federal Reserve will now cut interest rates before its 2 October meeting and possibly by as much as 50 basis points to boost liquidity.
Baring Asset Management agrees a rate cut by the Fed is likely, matched by a fiscal spending stimulus, which should assist financial assets and is therefore positive.
Bond markets are already pricing in lower short-term rates and a rise in longer-term rates, said James Williams, chairman of Barings strategic policy group.
Middleton said: 'The market is discounting the probability of a 25 or 50 basis points rate cut to boost liquidity on the back of the week's events.'
Trading volumes were thin, said Middleton, with most traders on a watching brief or looking to close positions, rather than take aggressive new ones. Many market makers were not operating at full strength, he added.
Cantor Fitzgerald, the market making firm responsible for more than two-thirds of the volume in the Treasury market, is believed to have lost as many as 1,000 workers in the New York terrorist attacks, but was able to re-open on 13 September, trading from a New Jersey back-up office.
Jim Leaviss, head of fixed interest at M&G, said that it had been possible to trade in government bonds during the two days of the US bond market being closed, if needed.
Leaviss also noted an impact on corporate bonds as investors sold out of those sectors most obviously affected by the tragedy.
He said: 'Some individual names in the corporate bond market have suffered. Airlines are underperforming, as air travel is less widely undertaken, and hotels and insurance companies have moved a little bit wider in terms of spread.'
The high yield market was initially rendered inert, he added, until liquidity eased on Thursday, when the markets reopened.
Nigel Morgan, economic strategist at Old Mutual Asset Management, said he expected to see bond prices rise as investors seek financial safety to compensate for their loss of physical safety.
'If investors become more risk-averse, they are likely to want the highest rated bonds, which may still be US Treasuries, though the larger UK and European sovereign issues will also be attractive to anxious investors. Corporate and emerging bond, especially the lower rated ones, may suffer a fall in demand until such time as confidence returns.'
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