U.S. government debt yields got a boost today, piggybacking on increases in Japanese bond yields as reports surfaced last week suggesting that Japan may tighten their monetary policy.
Japanese 10-year yields climbed four basis points–its highest level since February and the U.S. 10-year responded with its own 7-basis point jump to its current 2.96 percent yield as of 2:15 p.m. ET. The Bank of Japan is currently holding preliminary discussions to adjust its interest-rate targeting and stock-buying techniques–a move communicated by the BOJ as one that does not suggest a tightening of monetary policy, but one that the markets are interpreting as such.
“Although [the Bank of Japan]tried to really make clear this wasn’t a tightening policy, the market looked at it as another step away from easy money,” said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. “The idea that their yields would go up — albeit from nothing to 7 basis points — that really spooked the markets.”
Since September 2016, the BOJ has been pumping the brakes on its bond purchases, but in comparison to other economies, remains one of the least strict with respect to a quantitative easing strategy to help stimulate the economy.
“On Friday, the BOJ began to reenergize the notion of looking at their policy in a way that could steepen the yield curve,” said Robert Tipp, chief investment strategist at PGIM Fixed Income. “The message previously was that they don’t want too much volatility, but they might want a bit of a fine-tuning. All of those things plus the exchange with Iran, a little bit of geopolitical risk – they’re all curve steepeners.”
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Corporate Bond ETFs Down Slightly
The spike in Japan and U.S. debt yields took a slight hit on some corporate bond ETFs like Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH), SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB) and SPDR Blmbg BarclaysST HY Bd ETF (NYSEArca: SJNK). VCSH was down slightly at 0.03$, SPSB was down 0.08% and SJNK was down 0.02%.
Federal Reserve Chairman Jerome Powell met with Congress last week to give his semiannual, hinting at more interest rate spikes to come to accompany current economic growth. As such, Collin Martin, director of fixed income for Charles Schwab’s Schwab Center for Financial Research, said it’s best to keep focused on short-term bonds similar to the aforementioned.
“For now, I still think investors should focus on short-term fixed income. I don’t think the risk/reward makes much sense to extend the duration,” said Martin. “For now, shorter-term investments are offering higher yields, but in case yields do rise, I’m telling clients to get closer to the point where it makes sense to start extending duration.”
For more trends in fixed income, visit the Fixed Income Channel.