MacroResearchBoard

Losing The Global Bond Anchor – September 18, 2023

A just-released report updated our views on global financial markets, noting that a critical anchor on global bond yields over the past several decades was gradually lifting, namely Japanese bond yields.

The head of the BoJ recently hinted that the end of negative policy rates is possible, perhaps by yearend. To this end, 2-year Japanese bond yields look to have finally escaped negative territory, and 10-year yields are at their highest levels since the first half of the 2010s. Japanese inflation has finally emerged from a very long hibernation, and the tight domestic labor market bodes well for sustaining the strongest wage gains in a long time, which the government has been trying to encourage. Keep in mind, Japan is the one DM economy that wants sustainably higher inflation.

Any change in Japanese monetary policy on the margin and/or tolerance for higher bond yields would be bearish for global bond markets. Even a gradual uptrend in Japanese bond yields is something most global bond bulls have not had to contend with in their investment careers.

We remain underweight bonds within a global multi-asset portfolio.