Bond Outlook March 8th

This has been a week with two major global trends asserting themselves. They are linked:

• Liquidity is decreasing and, with, it the ability of global GDP to maintain its momentum
• Emerging markets have gone thorough a significant correction in both equities and bonds

All central banks are on a tightening path with the possible exception of the BoE. For the Fed and ECB it is a matter of degree, but for the BoJ a fundamental change in direction is finally happening – from zero to positive interest rates in both nominal and real terms (as deflation ends). Recently we have seen this change as simply introducing a shift in relative attractiveness for private Japanese investors from T-Bonds to JGBs. Yet it is more than that: the policy change implies the removal of a sizeable piece of liquidity from world financial markets. The rising bank rates in other industrialised economies are doing the same thing, and are, at last, washing through to long-term yields.

The USA is now firmly in the impasse into which it has been driving itself ever since the decision after the dot.com