Trump Bond Sell-Off Should Scare Central Banks

The bond riot triggered by the election of Donald Trump, amid rising investor concerns about his aggressive pro-growth policies, means that a credibility test beckons Bank of Japan Governor Haruhiko Kuroda. This is because of the latest expression of unconventional monetary policy adopted by the BoJ at its September policy meeting. The key point for investors is that the BoJ has seemingly promised to buy enough Japanese government bonds so that 10-year yields remain more or less around zero.

The attempt at central bank price-fixing is an extraordinary development and has not received the attention it should have. In fact, it is the most important development in financial markets in 2016. With Kuroda unable to push further into negative rates because of political constraints, the Japanese central bank governor decided to steepen the yield curve by raising longer-term interest rates. The 10-year Japanese government bond yield was minus 0.06 percent before the BoJ's announcement, though this was “up” from the trough in negative yields of minus 0.29 percent in late July. The yield has since risen to about 0.03 percent. In adopting this latest policy, Kuroda took up one of the suggestions floated by Ben Bernanke in blog posts in March and April, namely targeting yields higher up the yield curve.