For Tanguy Le Saout, head of European fixed income at Pioneer Investments, while the BoJ has hinted at actions that might cause a steepening of the yield curve he is of the view that it will do very little. A lack of movement that will ultimately disappoint markets, which will in turn put upward pressure on JGB yields.
Such a disappointment would be indicative of the mood that is permeating markets more broadly and one that is behind the drive up in global bond yields and credit spreads – the idea that central banks are cooling on the idea of adding further monetary stimulus.
This is worrying because, as Claudio Borio, head of the Bank of International Settlements’ monetary and economic department pointed out last Friday in remarks ahead of the release of its latest quarterly review, “Developments in the period under review have highlighted once more just how dependent on central banks markets have become.”
“It is becoming increasingly evident that central banks have been overburdened for far too long,” he added.
It is impossible to predict what exactly will happen on Friday, but increasingly markets are behaving like a toddler on a sugar high – unpredictable, impossible to please and prone to tantrums.
In such an environment it is unsurprising that many commentators are recommending taking risk off the table, as is the case with both Le Saout and Mark Dowding, partner & co-head of investment grade debt at BlueBay Asset Management.
This, said Dowding, should enable it to be well placed to buy assets on any further weakness.
“From a rates perspective, we sense that the bear-steeping in core government yields may start to lose momentum if risk assets weaken further as we note that little has changed in the fundamental backdrop and with inflation break-evens falling rather than rising in the sell-off, it suggests that some of these shifts may be temporary rather than long lasting,” he said.
Acknowledging that equity and bond markets have rallied during the first eight months of 2016 when the Fed has been on hold and other central banks have continued to ease policy, he said it is possible to imagine that should rates move higher in the US and there is no new monetary accommodation elsewhere, markets could surrender some of their earlier gains.
“The difficulty, however, is that we know that markets will overshoot and therefore it is tough for now setting levels at which it seems like a technical flush out will have run its course… The good news is that markets that behave in this fashion are inherently more inefficient and that should leave some anomalies and potentially attractive opportunities.”
