This summer’s bond rally is finally unravelling.
Japan has led the global sell off and yields are increasing across every continent. Bank of America Corp.’s G-7 Government Index bond average jumped over half a percentage point, which is its biggest climb in over a month.
While the UK was in the grip of its referendum vote on the E.U. this June, the general sentiment in the financial world was that world economic growth would slow enough to convince the Federal Reserve to leave interest rates unchanged.
It may well be the case that those same analysts are now wondering if yields dipped too far. Presidential candidate Donald Trump said that current interest rates are “at a false low”.
Bill Gross, a prominent financial manager and author, said that bets on the ultra-low yields are too risky. The company Gross founded, Pacific Investment Management Co., said the Japanese government bond rally is most likely at an end.
With the G-7 index now falling, many of the gains in early 2016 are now turning into costly losses. This year’s returns are now at a lowly 5 percent.
Bonds in Japan have declined the largest amount since 2013, according to data released by the Japan Bond Trading Co.
10-year yields gained to minus 0.096 percent from the low set in the summer and Gross said the rally “has most definitely fizzled out” due to the Fed reaching the end of the road with its fiscal stimulus plan.
Another telling indicator was the lack of action from the Bank of Japan, who opted to leave their negative interest rates unchanged, and did not expand the bond purchasing plan they already had in place since their last board meeting in July.
“It’s extremely difficult, even for central banks, to get a handle on the situation with bonds,” said Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management.
“Policy-makers simply don’t know what the right response is to the turbulent events of this year. Similarly market participants are not confident with the current state of play. Many have jumped on the gravy train and suddenly there has been a call for the end of the line,” Lane added.
The bond situation may not be settled for a while. With the fallout from Brexit still having a ripple effect and the upcoming presidential election in the U.S., not to mention the continued slide of crude prices, investors would be wise to stay passive in the market for the near future.
