The central bank meeting of the century, in the Century of Central Banks, proved to be a damp squib. And the result, as is usually the case with a damp squib, is a misfire, in my view.
Coming into today’s comprehensive policy meeting of the Bank of Japan (BOJ), capital markets, especially global bond markets, were rapt in thought and anticipation. Unfortunately―or fortunately if you are a bond market bull―there was not a lot there there.
The three key points in the BOJ’s new policy pronouncements are:
- It has adopted QQE (Qualitative and Quantitative monetary Easing, if you really wanted to know) with Yield Curve Control. The BOJ will now try to control the entire yield curve, both short-term and long-term interest rates, and has essentially given up on targeting the quantity of the monetary base.
- It will continue to buy Japanese government bonds to the tune of 80 trillion Japanese yen, with a 10-year yield to be around 0%.
- It will continue to buy Exchange Traded Funds (ETFs).
Global Rate Picture Unchanged
Among global market participants and observers, there was much talk of yield curve management by the BOJ leading up to today’s meeting, but with no clarity as to what that means. The reaction so far has been underwhelming in the rates market. Japanese banks, the primary and perhaps sole beneficiary of higher long-term yields, rallied, of course.
I, for one, was deeply apprehensive that the BOJ could commit to some arbitrary level of long rates or term premium or such, presumably at a higher level than what prevails in the market today. However, that was certainly not the case. BOJ policymakers may get to it later, under the guise of Yield Curve Control, but they are not there today. The market reaction could easily have been severely negative. Instead we are all, especially if you are a bond bull, breathing a sigh of relief.
Bottom Line: Today’s much anticipated BOJ meeting didn’t change the overall global interest rate picture much, in my view. If anything, with a specific strategy of Yield Curve Control from the most proactive central bank in the world, I would expect rate volatility to actually go down, as now the BOJ is active on both sides of the yield curve.
And now, onto today’s Fed meeting. I do not expect much there there, either. The second decade of the Century of Central Banks continues.
Risks associated with rising interest rates are heightened given that rates in the U.S. are at or near historic lows. When interest rates rise, bond prices generally fall, and share prices can fall. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.