The yield of stalwart benchmark, the US 10-year Treasury bill, broke the 2016 peak of 2.64% last month – and with it global bond yields across the board drifted higher. Although US Treasury yields appear to grow ever nearer to 3% – a significant top when looking at recent years – the likelihood remains slim for 2018, in no small part because of BoJ policy and actions. 1
CB Policy – Intersectional Outcomes
The days when monetary policy action impacted the target domestic economy in isolation are well and truly over. While we might expect Fed policy, rate rises and economic growth to push US bond yields above 3% this year, ECB and BoJ policy action will dampen the amplitude of the upward trend. Specifically, recent research from Macquarie indicates an expectation of the BoJ to continue to target a 10-year yield around zero and for the ECB to maintain a negative policy rate until 2019 – forecasting that the BoJ will “maintain the overnight policy rate at minus 10 bps and the 10-year yield target near 0% throughout 2018”. 1
Bank of Japan – Focussed on yield curve control
With GDP growth reaching 2.1% in the year to September 2017, Japan is experiencing an economic recovery, driven by growth in business investment, improving sentiment and increased net exports. While the BoJ has reduced the rate of balance sheet expansion, Governor Kuroda has made his thoughts clear, stating that “There is still some distance to 2% inflation, so we’re in no condition yet to debate the timing of an exit from ultra-easy monetary policy”.1 In line with Governor Kuroda’s comments, the conditions that Japan is facing do not suggest monetary policy tightening is on the cards this year – with weak pricing pressure materialising alongside low inflation expectations. Further cause for caution on tightening is the consumption tax hike scheduled for October 2019.
While Japanese bond yields remain suppressed, the ECB is forecast to maintain policy rates at -40bp whilst continuing with asset purchase tapering. This action will most likely lead to a steepening of the yield curve, with the 10-year bund yield nearing 1%. Meanwhile, across the pond, the Fed is expected to raise rates 3 to 4 times (to 225 bps to 250 bps) this year – most likely inducing yield curve flattening such that we might realistically expect the 10-year rate to tick up to only around 2.75% by Macquarie’s estimate. 1The sub-3% yields on offer from long term Treasuries will support US equity performance – further buoyed by economic growth and tax reform led profitability. On balance, despite economic growth, the BoJ is firmly focussed on yield curve control. The reach of this policy stance is far reaching. Therefore, for the time being, equities continue to look comparatively attractive against fixed income securities – both within and beyond Japan’s borders.
1Macquarie Research, Japan at the Centre of The Great Bond Debate, 25th January 2018