Fixed-Income Markets

The start of fiscal 2010-11 saw bond yields fall through October and early November as investors waited for a policy announcement from the U.S. Federal Reserve. After the Federal Reserve confirmed that a second round of quantitative easing was actually being implemented, yields rose steadily until February of 2011. Through its buying of government debt, the U.S. Federal Reserve was attempting to improve the value of risk assets and generate a small increase in inflation, and by early April, bond yields all over the world had reached new highs for the year. In July and August bond yields collapsed in reaction to weaker than expected economic growth, fears of a potential U.S. debt default due to the debt ceiling, and a new concern that European sovereign bailouts may extend to more countries than originally anticipated.

Like equity markets, there was a significant dichotomy in world bond markets in 2010-11. While the U.S. Federal Reserve was trying to reflate risky assets, Greece, Ireland and Portugal were all receiving bailout funds from the European Central Bank and the International Monetary Fund. This led to a situation where the U.S., Canada and other “safe haven” countries saw their bond yields fall to historic lows, while many European counties saw their yields rise to the highest levels since 2001.