For the first time since 2009 all the major central banks are singing from the same hymn sheet: the only way is up! Even the Bank of Japan has now decided to increase the bandwidth within which it will allow bond yields to move, a signal that they are prepared to let interest rates start moving higher.
And, although the central bank chiefs are not exactly shouting it from the rooftops, the message is clear: they are gradually going to increase interest rates and let bond markets worldwide move more freely. As a result, actively managing interest-rate risk will become more important for bond investors and potentially also more lucrative. Robeco’s QI Global Dynamic Duration strategy is designed to exploit yield moves and is well-positioned to benefit in this challenging environment.
The Bank of Japan (BoJ) has implemented more extreme policy measures than any other central bank in recent years. Not only has it introduced negative interest rates and bought up a huge amount of its own sovereign debt – it owns more than 40% of all outstanding Japanese government bonds – it has also introduced a 0% target for 10-year government bond yields and ensured that yields remain within 10 basis points of this target level. Japan’s central bank is now relaxing the last of these measures and, in its recent meeting, the BoJ decided to allow yields to rise gradually. In the ensuing press conference, president Kuroda said that the target yield range would be doubled. However, just two days later, the BoJ proved to be more measured in its actions than in its words: intervening before 10-year yields reached 0.2% and purchasing JPY 400 billion (EUR 3 billion) of 10-year bonds in an unscheduled operation after yields had only ticked up to 0.14%.
Although the Bank of Japan is taking things gently and letting bond yields rise only very gradually, this step still means that the policy direction is now the same for all the major central banks: the Fed is hiking rates and shrinking its balance sheet, the Bank of England has just hiked rates again and the ECB is winding down its bond-buying program and signalling that it is likely to start hiking rates in the third quarter of next year. Global bond markets will now have to cope with higher short-term rates and central banks that are on aggregate reducing rather than increasing their bond portfolios. Furthermore, higher Japanese bond yields make foreign bonds less attractive to Japanese investors and the lower demand this may cause could also lead to higher yields on Eurozone government bonds. US bonds have already become unattractive for Japanese investors, as the Fed’s rate hikes have increased the costs of hedging the currency risk. As a result, Japanese investors are reducing their holdings of US Treasuries.