IEI - Spare A Thought

• Before the supply-constrained economy that emerged after Covid, and the war in Ukraine, attempts of a sustained rise in global short-term interest rates had to contend with the fact that at least two major central banks, the ECB and the BOJ were stuck in the mud at the zero bound.
• Now, however, the shoe has shifted to the other foot, thanks to higher inflation, which is proving neither moderate nor transitory. Long-term bond yields have soared in the US, the eurozone and in the UK.
• However, long-term bond yields have barely budged in Japan, as the BOJ had stalwartly stuck to its yield curve control, despite inflation zooming past its 2% target in April.
• Investors seem intent on continuing to sell the JPY until and unless the BOJ lets yields rise, but if they do that, markets almost surely will switch to selling JGBs.

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