How Much Longer Can Central Banks Push Bonds to Absurdity?
Central banks around the world have fallen all over each other lowering their benchmark interest rates. On Tuesday, the Reserve Bank of Australia was the latest, cutting its cash rate to an all-time low of 2.25%. It didn’t mince words: “A lower exchange rate is likely to be needed to achieve balanced growth in the economy.” A rare admission of escalating the currency war. The Aussie dollar immediately swooned.
Two weeks ago, the Bank of Canada suddenly cut its overnight interest rate by 25 basis points. Other central banks have chimed in. Japan’s rate has been at zero for years. “Negative deposit rates” have infected a number of central banks, including the ECB.
In this environment, the Fed is talking about raising rates from zero to next to zero, but the markets are not following its hints and are trying to force it to back off.
Ten-year government bond yields in Japan and Germany dropped closer to zero, before bouncing off in a sharp rally to 0.39% and 0.31% respectively. This is called the “Japanification of Germany.”
Back in August 2013, when 10-year JGBs still yielded around 0.8%, I wrote, Why I’m Deeply Worried About Japan – And Why Betting On The Collapse Of JGBs Is A Horrible Idea, which has become a leitmotif. Japan’s fiscal situation has deteriorated since, but JGBs have risen and yields have dropped, with shorter maturities sporting “negative” yields. JGB shorts have been kneecapped. Inflation is 2.4% as measured by the all-items index, and 3.1% for goods. Financial repression has become the rule.
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