How easy G3 monetary policy spills over into East Asia

November 2, 2013

A recent BIS paper illustrates the consequences of highly accommodative monetary policy in the G3 for East Asia. These include lower policy rates than warranted by domestic conditions, lower bond yields and appreciation pressure on currencies. Importantly, easy G3 monetary conditions stimulate Asian foreign currency borrowing in many forms, including letters of credit, forward selling of foreign currencies and international bond issuance.

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Japan’s new policies and the threat of rising yields

August 10, 2013

A large rise in bond yields would threaten Japan’s sovereign solvency and banking system stability (view post here). New IMF econometric estimates suggest that the Bank of Japan’s quantitative and qualitative easing should lift yields just modestly, as rising inflation expectations would be offset by large public bond purchases. Meanwhile, the deteriorating fiscal trajectory could cause a 400bps rise in JGB (Japanese Government Bond) yields by 2030.

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Bank of Japan policy and long-term bond yields

July 24, 2013

A speech by Bank of Japan’s Takehiro Sato underscores that stabilizing long-term JGB yields has become a particular focus in the context of “Qualitative and Quantitative Easing”. This reflects the vulnerability of the country’s banks to higher yields (view post here), and the huge debt stock of the government. The Bank reckons that the sheer size and flexibility in its bond purchase program are at present sufficient to contain yield volatility and levels.

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Japanese banks’ vulnerability to rising bond yields

July 10, 2013

Standard & Poor’s research suggests that Japanese banks’ government bond holdings and interest rate risks of have almost doubled over the past 10 years. Against the backdrop of more aggressive reflation policies (view here) this translates into a systemic risk. An increase in long-term yields by 200bps compared to 2012 could already impair the banking system. An increase by 300bps or more could spell broadly based challenges for capital adequacy. A concurrent drop in equity would increase the pressure.

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Overshooting of U.S. Treasury yields

June 17, 2013

The U.S. rates research team of Bank of America/Merrill Lynch reasons that fears of less accommodative monetary policy can trigger a rise in U.S. Treasury yields that goes beyond the rationally expected path in fed funds rates. Catalysts of such non-fundamental dynamics can be (i) increased mortgage convexity risk, (ii) spillovers and repercussions from other bond markets, and (iii) duration hedging in the wake of bond fund outflows. Thereby, large institutional flows in a market with few players to warehouse risk can lead to an overshooting of yields.

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A Fed view on low long-term yields

March 9, 2013

Federal Reserve Chairman Bernanke recently explained globally low long-term yields as a combination of anchored inflation expectations, negative real policy rates, and a compressed term premium. The latter is seen as the key development since 2010 resulting from (i) the surge in private demand in the wake of reduced nominal volatility and negative correlation with risk markets and (ii) a surge in public demand resulting from asset purchase programs and FX reserves replenishing. Bernanke emphasizes that the Fed, markets, and forecasters all expect long-term yields to drift higher by 50-75bps per year through 2017. Yet, actually his reasoning would make a sustained directional change in yields contingent on fading crisis and deflation fears.

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