Bond Outlook February 10 2010

Whilst merely murmuring last week, bond markets have begun to speak much more forcibly, and are now perhaps even shouting! Spreads are widening and, even more significantly, market makers are loath to bid, even for retail order sizes. Our recommendation in favour of high quality and short maturities has become the main preference of fixed-income investors, and this has led to a severe reduction in liquidity. Ominously the drying up of liquidity in bond markets has, in the past, been a precursor of a financial market crisis – not quite the same as an economic crisis, but closely linked.