On August 9, bondholders refused to sell in the quantity the Bank of England wanted, inconveniencing its attempt to pump money into the economy. What were they thinking? The 30-year gilt has since fallen about 8 per cent, pushing its yield up 30 basis points. Gilts joined a mini-trend in place elsewhere. From their July lows, 30-year yields are up 30bp for the US and a startling 50bp for Japan.
Falling yields stretch back to 1981, when they peaked at over 15 per cent. The reversal of such a longstanding trend — should this be it — could be cause for celebration or despair, depending on what causes the shift.
Facile explanations of the recent trend focus on investor sentiment. True, a Bank of America Merrill Lynch survey found that money managers have boosted their cash holdings (a majority say both stocks and bonds are overvalued). Yet a month ago investors were determined to hold bonds at any price, as the bank bought with an open wallet.
Better to ask what drives investor views. There is a sense that central banks are altering course. The bearish interpretation is that they have given up, spooked by claims that monetary stimulus merely serves to make life difficult for pension funds and banks.
There is a happier view, and some evidence to support it. Yields are rising because monetary easing works, and central banks are happy to let it. This is clearest in the UK, where policy has eased despite an encouraging flow of data and inflation expectations up over 50bp since the spring. Expectations have risen in the US too, and household incomes recorded a 5 per cent real expansion in 2015. And, as Goldman Sachs has speculated, in Japan, the US and Britain there is growing support for fiscal expansion, which unambiguously raises rates.
Nothing is ever purely one thing or another. Central banks are rethinking their tools, and some data — notably recent US payrolls — are weak. But had central banks really decided to give up regardless of whether they were hitting their inflation mandate, the worrying conclusion to draw would been that they are happy to tolerate lower nominal growth. Were this to transpire, yields would not stay high for long. And equities would plummet too.
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