While bond yields have risen recently, to me, this looks like another episode of “taper tantrum,” where bond prices are recalibrating to prepare for a (perceived) less aggressive monetary policy. In the developed markets, low growth and subdued inflation outcome/expectations mean monetary accommodation is set to continue. Bond yields will remain low until such time as the global economy is back to its normal growth rate. If that takes another decade, then so be it. At least in the Eurozone and Japan, I see bond yields remaining low for the foreseeable future. These markets will not be broken by central banks. In many respects, the central banks “own” these markets. If anything breaks the market, it will be the upheaval that only politics can cause the US election, the Austrian election, and the Italian constitution referendum amongst others. One aspect of monetary policy accommodation which hasn’t worked, is the negative interest rates policy (NIRP). Lower rates have a depressing effect on household incomes, through reduced interest on savings and pensions. To my mind, NIRP will, in due course, be seen as a major policy error and the BOJ specifically, has painted itself into a corner. With respect to the FOMC meeting this week, I believe it will be a very close call and should we get an interest rate hike, it will not spook the market and financial stocks should rally post hike.
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