The BoJ’s shock move had a ripple effect through bond markets.
Japan’s 10-year rate itself plunged by 13 bps to a record low of 0.10% and Germany’s 10-year rate fell by 8 bps to 0.32%. If it hadn’t been for the BoJ move, one would have thought that US Treasury yields would be higher, given improved risk appetite, higher oil prices, higher equity prices and better economic data – including the better composition to the Q1 GDP data and the sharp rebound in the Chicago purchasing manager’s index to 55.6 (expected: 45.3).
But with the BoJ adding to the number of central banks with negative rates – including the ECB, Swiss National Bank, Danish central bank and Sweden’s Riksbank – attention turned to the prospects for US monetary policy.
No further rates hikes for this year are now priced in by the Fed, with the stronger USD doing a lot of the heavy lifting in tightening US financial conditions, and some even speculate that at some stage the US itself will be forced to adopt a negative policy rate.
That sentiment helped drive down US rates, with the 2-year Treasury rate down 4bps to 0.77% and the 10-year rate down 6bps to 1.92%, the lowest close since April last year and now decisively below the psychological 2% mark.
The local rates market was quiet on Friday, with Japan’s move coming right at the end of the session. The swaps curve barely budged, following the active period immediately after the RBNZ’s statement on Thursday.
NZ’s government bond yields were slightly lower on offshore factors and further downside pressure on yields can be expected today, as the market reacts to the further rally in global rates. The NZ 10-year rate (2027 bond) fell by 4bps to 3.22%.
Investors have a lot to ponder following the close of the first month of the year.
For risk assets, the month began on a very rough note with China in focus as well as plunging oil prices, but sentiment has improved significantly towards the end of the month. China has managed to stabilise its currency, for now.
Oil and equity market prices have rebounded strongly.
Central banks are back in the forefront of mind with the BoJ easing, the ECB hinting of further easing in March, the RBNZ widening the door slightly for further possible easing this year, and widespread expectations that the Fed now is out of the picture for further tightening in 2016.
All this led to a strong rally in bond markets during January with both NZ and US 10 year rates down by about 35 bps.
It’s clear that markets are feeding off the generosity of central bank action, and this can run for some time yet, but there will come a day when the limits of monetary policy have been reached.
There is no happy ending to this story.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.