Bond yields ratcheted higher globally last week, with a key trigger being shifting interest rate expectations in Japan. Will there be moves to repatriate overseas bond holdings to take advantage of these higher domestic rates? Read on for a breakdown of fixed income news across sectors and regions.
Macro/government bonds
Bond yields ratcheted higher last week, a move that was amplified by the dampened liquidity of early December.
A key trigger was shifting interest rate expectations in Japan. Bank of Japan governor, Kazuo Ueda, said the central bank would consider “the pros and cons” of raising its policy rate at its December meeting. The market-derived probability of a December rate hike rose from 58% to 90%, while the yield on the Japanese two-year rose 7bps to 1.05%, while the Japanese 10-year rose 14bps to 1.95%. Both are levels not seen since 2007 (see Chart of the week). The move prompted concerns that Japanese life assurance companies might start to repatriate overseas bond holdings to take advantage of more attractive domestic rates.
In the US it was a week of mixed economic data, and we saw Kevin Hassett, Director of the National Economic Council, emerge as favourite to replace Jay Powell as Chair of the Federal Reserve (Fed). Hassett is widely regarded by the market as a more malleable candidate, and his likely nomination will highlight the politicisation of the Fed under Donald Trump.
In the eurozone, European Central Bank (ECB) executive board member, Isabel Schnabel, said she expected the next move in eurozone rates would be up, describing risks to the economy and inflation as “tilted a little bit to the upside”. Her more hawkish tone contrasted with that of other ECB policymakers who described eurozone monetary policy as appropriate.
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