Positive Rates Again
Global bonds are getting hammered this week in response to Donald Trump’s elevation to President of the United States.
His victory kindled a rise in bond yields, most prominently in Japan, where interest on 10-year Japanese notes swung into positive territory for the first time since the Bank of Japan (BoJ) started its ambitious monetary program.
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The yields on Japanese government bonds swung above zero around 10:40 a.m. EST on Tuesday, and stayed there until the end of normal trading hours. (Source: “As Japan’s 10-Year Bond Yield Turns Positive, BOJ’s Experiment Is Tested,” The Wall Street Journal, November 15, 2016.)
Although yields reached as high as 0.016% in the afternoon, they settled at 0.009% by the evening hours. It is only a hair above zero, but breaching that threshold is big news in finance.
The Bank of Japan was in the middle of an experimental new policy which keeps the target rate for 10-year notes near zero. This allows the bank to compress interest rates and stifle the borrowing costs of Japan’s government through an expansionary stance on monetary policy.
The fact that short-term interest rates are negative means that investors are paying the government to borrow their money.
It is an unorthodox strategy for inciting economic growth, but it fits into Prime Minister Shinzo Abe’s three-pronged strategy for revitalizing Japan. Expansionary monetary policy was one of his three “arrows,” alongside stronger fiscal policy and broad-based structural reforms.
Yields were also entering negative territory in Germany and other parts of Europe, but the recent U.S. presidential election drew a lot of money from those assets. Investors are anticipating better economic growth and higher inflation from a Trump administration.
As a result, they are switching from debt assets to equity, driving the Dow Jones Industrial Average (DJIA) to new all-time highs at the expense of short-term bonds.
Since yields are being pushed higher across the board, investors are watching to see if the Bank of Japan will intervene and push rates back below zero. Analysts are doubtful that the BoJ will step in unless 10-year yields break the 0.1% barrier, in which case they may buy some bonds.
