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Gross calls bond bear market after Japan shock

Surprise move by Bank of Japan to taper bond buying programme sends ripples through fixed income market.

Gross calls bond bear market after Japan shock

A surprise move by the Bank of Japan to reduce the amount of bonds it buys every month under its stimulus programme has sparked jitters in the fixed income market.

The Bank of Japan has reduced its  monthly purchases of 10- to 25-year government bonds and 25 to 45-year debt by 10 billion yen (£66 million) to 190 billion yen and 80 billion yen.

While that amounts to only a small change, the hint of a tapering to stimulus was enough to send bond prices lower, and yields higher.

The yield on US 10-year treasuries hit 2.57% overnight, its highest level in 10 months, prompting fixed income guru Bill Gross to declare a 'bond bear market'.

Analysts at Rabobank said that while the 10-year treasury yield had reached higher levels in March last year, the latest sell-off appeared significant.

'We might just have broken the long-run bull-market trade of the past few decades,' they said.

Michael Hewson, chief market analyst at CMC Markets UK, said the spike in bond yields reflected investors' surprise at the Bank of Japan's move.

'While some have speculated that yesterday's move was only a technical change, the move sent a ripple through the bond markets, pushing yields up on US treasuries and other bond markets as traders and investors re-adjusted their positions amidst a worry that they might be underestimating the pace at which central banks might look to withdraw stimulus in the coming months,' he said.

Jim Reid at Deutsche Bank said the market reaction was out of kilter with the Bank of Japan's move.

'While it seemed to come as a surprise, it's worth noting that the absolute purchase level was still within the Bank of Japan's target range of purchases,' he said. 'Imagine the scenario if something major happened!'

The spike in bond yields meanwhile boosted the share prices of banks, whose net interest margins receive a boost from higher borrowing rates.

Royal Bank of Scotland (RBS) rose 3.2% to 289.5p while HSBC (HSBA) was up 2.9% at 788.5p, helping drive the FTSE 100 to a new record high of 7,754.

4 comments so far. Why not have your say?


Jan 10, 2018 at 19:03

Bill Gross is continually wrong in his predictions. I would recommend investors read the book by Gary Shilling, "Deflation". Gary Shilling has a BS in Physics from Amherst and a Ph.D. in Economics from Stanford. In his book Shilling says that deflation will not go away so easily because of aging demographics, technology and globalization. Bill Gross was fired from his job at Allianz for poor performance. My advice to fellow retail investors his to ignore Gross and follow Gary Shilling.

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Alastair Kendall

Jan 10, 2018 at 23:48

Why would anyone be mad enough to buy bonds with a negative yield to redemption anyway?

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Mark Stringer

Jan 13, 2018 at 09:54

Alastair Kendall, I too couldn't understand this nonsense when I read about negative bonds a couple of years ago, but it seems, if I understand it, that it is linked to debt by governments and how central banks etc have to hold certain asset classes. All that tinkering with what passes for economies now. So, yes, in my opinion you are right it is mad.

I also believe that some investors buy them to try and play the currency market by buying the bonds of say Japan they might benefit from the exchange rate of the yen and guess that applies to the Euro.

I read about German negative bonds being a safer haven for money with people prepared to accept a limited loss rather than take a punt on a more risky bond with a positive yield; at least they get most of their capital back.

I don't know if this is a symptom of the bull manure world we inhabit now, but bonkers appears to be the norm now.

If I am wrong I am always happy to be put right as perhaps there is more to this than the question of sanity.

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Mark Stringer

Jan 13, 2018 at 10:07

SDRL, I can't keep up with all of the bear, bull (plenty of bull as usual as I suppose if you say it often enough sooner or later you will be right) melt up, melt down,..........

I'm waiting for the up, down, sideways, bumper car, ETF, tracker, bond, reverse negative positive market to come along.

I wonder if some of these people ever go home and think "what the hell am I talking about".

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