The simple answer is that the Bank of Japan (BOJ) is yielding its market set. For years, BOJ has implemented very loose monetary policies, including capping yields and negative interest rates at very low levels. Limited economic growth and layoffs have made such policies possible. However, inflationary pressure and a weak circle have prompted the BOJ to shift its stance. Policy normalization began in 2023, when JGB yields for over 10 years allowed to exceed 1% for the first time in more than 10 years.
Today, 10 and 30-year bond yields are 1.60% and 3.20%, respectively. They better reflect the expectations of a continuing, tougher monetary policy as inflation remains above the BOJ’s 2% target. Furthermore, the persistent weakness of the yen, which has worsened with low interest rates against the US, forces the BOJ to encourage higher interest rates to stabilize the currency.
Japan’s economic improvement and inflation rates will hope that the BOJ could abandon its interest rate cap and negative interest rates altogether. Furthermore, public debt exceeds 250% of GDP, causing concerns about long-term fiscal sustainability to spread. As a result, these factors are added to the upward pressure on yield.
The risks for stock investors in the US and around the world are to have a high yield in Japan and to force a reversal of yen fares. If you remember, we saw what it looked like in August 2024.
What to see today
Revenue
- There are no notable revenue reports
economy
Market trading updates
yesterdaydiscussed the backdrop to the tying. We also added long-term bond retention for our portfolio due to deep sales conditions. However, there is a rather big, obvious mistake between the current narratives. “deficts” It’s causing yields. The problem is that we have been running the deficit for over 40 years, and today’s deficit is lower than it was five years ago. But what’s out there is a key reason why the rates are now higher than in 2020.
As shown, the correlation between deficits and fees makes sense. The decline in deficits since 2020 is a function of stronger growth and reduced debt issuance. As the deficit decreases and economic growth strengthens, borrowers can seek more yields. Conversely, when economic growth drops sharply and deficits increase due to increased debt issuance, yields decrease. This correlation can be seen in the chart below:
As we discussed yesterday, the short-term story has the yield of drive drives along with massive disadvantages and central bank intervention. As the Federal Reserve and Treasury intervene to control the rise in yields, yield reversals are rather sharp to protect financial stability. But it could be months or quarter apart.
In the meantime, we will need to use our swing in the bond market to increase our revenue from bondholdings. As shown now, long-term bonds are being sold in a very oversold and require reflexive gatherings. What caused the meeting? Who knows, some headlines appear and suggest that lower inflation rates and slow economic growth and yields respond accordingly.
As shown, TLT is currently trading below average three standard deviations below average, suggesting that meetings to 88 (average) are possible.
In the meantime, you can clip the 4.5% coupon while waiting for short-term gain.
The 20-year auction wasn’t as bad as the headline.
- Today’s tragic 20-year auction – The horrifying meaning from Twitter/X
- The US had just held a 20-year financial debt auction, which turned into Twitter/X
- Finance auctions for 20 years are getting worse – Baron
Social and traditional media created Wednesday’s 20-year auction as one of the worst financial auctions ever. But we classify it as Tepid. Let’s look at some facts and make your own decision.
First of all, the 20-year-old Treasury Department is a kind of orphan bond. The supply and demand for 20-year bonds is not as large as liquid as 2-year, 3-year, 5-year, 10-year, 30-year bonds. Therefore, it tends to lead to more volatile auction results due to reduced liquidity and smaller auction sizes.
Tweets that day showed that the auction’s “tail” was 1.2 bps. Therefore, the auction rate was 1.2 bps higher than where it was traded before the auction. The graph shows that the +/- 1bps result is somewhat normal.
Consider that indirect bidders, primarily central banks, won 88% of the auction. Direct bidders, the auction backstop, won a relatively low of 8%. In other words, the auction didn’t need the largest bank to support it. The graph below shows that direct bidder allocation was on the lower side of recent auctions.
Certainly, the auction could have been better, but the media exaggerates the outcome and cultivates the story of the current bearish bond.
The role of bonds in a balanced investment portfolio
When building a strong, diversified portfolio, most investors focus on stocks. However, bonds play an equally important role. Especially when managing risk and providing consistent income. Incorporating bonds into your investment portfolio can lead to a more stable investment strategy and long-term financial resilience.
Whether you’re just starting out in investing or looking to re-align your asset allocation, understanding how bonds work and how to use them effectively is key to building a balanced portfolio.
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