LONDON (Reuters) – For some anxious investors, bond markets have lost the plot.
With yields across the developed world in free-fall, markets appear to have convinced central banks that only drastic monetary stimulus can prevent inflation expectations from evaporating for a lifetime. But might those markets be reading it wrong?
Policymakers - Japan - Zone - United - States
If so, policymakers in Japan, euro zone and United States, who are readying interest rate cuts and dusting off the money-printing presses, may end up with a costly error on their hands.
Having spent years chasing a 2% inflation target, these central banks are sufficiently mindful of their credibility to be spooked by what markets are saying. Hence their collective pivot toward easier policy, a U-turn from six months ago.
Plenty - Folks - Steer - Banks - Markets
Nevertheless, plenty of folks are questioning the steer central banks are getting from markets, arguing that inflation outlook is not as dismal as it’s painted to be.
“Markets can make mistakes. The bond market may have over-reacted. That does worry me,” said Colin Harte of the multi-asset solutions team at BNP Paribas Asset Management.
Lot - People - Expectations - Banks - Markets
“A lot of people have expectations of central banks being very accommodative and sensitive to financial markets. There’s a danger in that.”
The messages from markets are certainly alarming. German 10-year bond yields have fallen past the European Central Bank’s -0.4% policy rate. And it is just part of the negative-yielding bond universe globally, a cohort that’s worth some $13.5 trillion.
Investors - US - Government - Debt - %
Investors are now willing to hold U.S. government 30-year debt at 2.4% yield – either a bet that inflation won’t accelerate between now 2049 or at least that real, or inflation-adjusted, interest rates will stay close to zero for the next three decades. Either way, it’s a dramatic reading of future.
A similar message can be read from market-based future inflation gauges – five-year inflation-linked forward swaps that measure expected euro zone inflation over...
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