US Fed on Opposite Track to Other Central Banks

Posted on September 22nd, 2016

Short-term U.S. bonds have been rising slowly as long-term bond yields have been dropping, leading to a “flattening of the yield curve.” Such a dynamic helps bond analysts and economists to determine if there’s an economic slowdown or even inflation on the horizon.

The Bank of Japan has unveiled an ambitious strategy to set a zero yield target on its 10-year government bonds, seemingly uncapping the limit on bond buying. The BOJ has already been flooding the economy with cash over the past 3 years in addition to the negative interest rates it introduced earlier in 2016. It aims now with this new 10-year zero yield target to boost inflation and hopes to overshoot the 2% mark as opposed to simply meeting it. This kind of strategy is not without precedent, as the United States Federal Reserve initiated a similar program after World War II.

The Bank of England launched its biggest stimulus package since the financial crisis with its first rate cut in more than seven years and a new £70 billion bond-buying program. The bond-buying program will include £10 billion sterling denominated investment-grade corporate bonds and the remaining £60 billion will comprise purchases of government debt. Britain’s central bank, the Bank of England, issued a negative outlook, stating that British households faced a poorer future.  The Bank of England is forecasting that unemployment will rise, housing prices will fall and inflation will go up.

The Bank of England as well as central banks in Japan and the eurozone are now buying large amounts of sovereign bonds, as global benchmark yields continue to descend to new lows, exacerbating the matching of future long-term liabilities for pension plans and insurance companies. The amount of global negative yielding debt has now risen to $12.64 trillion, and is dominated by European and Japanese bonds.

While these lower rates and stimulus efforts are underway in Europe and Japan, the Fed is on the opposite track, preparing to tighten. While they did not raise rates at their most recent September meeting, comments from various Fed governors and presidents, as well as chairman Yellen herself have indicated there is a strong possibility of a rate hike very soon.

Sources: Bank of England, Bank of Japan, Eurostat, U.S. Treasury