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Liquidity evaporates as government bond market volatility spikes

It’s not just asset managers closing their books ahead of year-end that is behind the loss of liquidity in the most active fixed income markets.

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Bond market volatility has increased in lockstep with uncertainties about the Omicron variant and the likely course of central bank monetary policy to combat inflation.

Less noticed, liquidity has deteriorated even in the world’s most actively traded bond market. It will now be difficult for investors who are long and wrong on rates to average out without a great deal of pain.

Heading into December, Bank of America’s MOVE index of US Treasury volatility was at highs not seen since the omnicrash on lockdowns in April 2020. The bank’s financial advisers were reporting private client holdings of debt down to 17.1% of total assets under management from 25% at the start of the pandemic and a peak of 34% in 2009.

Loss of liquidity has bedevilled bond markets since the great financial crisis and the imposition of proper capital and leverage ratios on banks

Even before year-end, in mid-November rates volatility was making it difficult to price new issues even of below investment-grade, high-coupon instruments.

With commodities offering a 57% annualized return, US treasuries were on track to hand owners a 3.7% loss, with the 30-year down 7.6%.

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