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    1. The end of the NIRP experiment

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    Bond Bulletin

    GFICC Investors

    24 June 2022

    The end of the NIRP experiment

    Rising inflation around the world could spell the end for negative interest rate policies – except in Japan.

    Fundamentals

    In an effort to stimulate economies and push up inflation in the aftermath of the 2008-2009 financial crisis, central banks adopted increasingly unorthodox measures, most notably the negative interest rate policy (NIRP). Over a decade later, high and rising global inflation pressures could spell the end of the NIRP experiment. Last week, the Swiss National Bank (SNB), an early adopter of NIRP, opted to raise rates by 50 basis points (bps), its first hike in over 15 years, while the European Central Bank (ECB), another NIRP proponent, signalled that rate hikes are now on the table at its July and September meetings. In both instances policymakers noted that the falling domestic currency was effectively “importing” pricing pressure from overseas, further de-anchoring inflation expectations and highlighting the need for tighter policy. The Bank of Japan (BoJ) remains an outlier, doggedly holding rates in negative territory and vowing to defend its Yield Curve Control (YCC) program, which effectively caps the yield on the 10-year Japanese government bond at 0.25%. However, mounting investor pressure forced the BoJ to spend a record JPY 10.9 trillion (USD 80.7 billion) last week to defend the YCC policy, a weekly figure that dwarfs the ECB’s monthly target of EUR 30 billion in asset purchases. With the BoJ digging its heels in, the yen is now trading at its lowest level vs. the US dollar since October 1998. (All data as of 22 June 2022.)

    The Bank of Japan was forced to spend a record amount to defend its YCC program

    Source: Bloomberg, J.P. Morgan Asset Management. Data as of 22 June 2022.

    Quantitative valuations

    NIRP has effectively acted as a heavy anchor weighing down bond yields globally and suppressing fixed income volatility. However, tighter monetary policy and higher inflation have swiftly melted the stock of negative yielding debt, falling from over USD 11 trillion at the start of 2022 to just USD 1.6 trillion as of 22 June 2022. The sell-off in core bonds has had knock-on effects on higher yielding parts of the fixed income market. Emerging market valuations, particularly in high yield, are trading well above historic averages, offering investors plenty of cushion against further volatility. While short-term flows can be driven more by fear than by valuations, higher bond yields across the board are offering long-term investors attractive entry points into bond markets.

    Technicals

    As central bank policy enters this transition period, volatility in financial markets is likely to remain elevated. In the six trading days surrounding the week of the Federal Reserve (Fed)’s 15 June 2022 meeting, the two-year yield moved more than 5 bps each day and, on average, moved 17 bps daily as investors attempted to digest the Fed’s announcement. Meanwhile, central banks’ actions are also having a significant impact on currency markets. Last week, the euro’s intra-day trading range hit its highest level since March 2020 as the market attempted to digest the latest forward guidance (or lack thereof) from the ECB. Despite the grind higher in bond yields, investors continue to remain on the sidelines. Positioning surveys continue to suggest that investors remain underweight duration and that fixed income outflows have continued. For example, US investment grade has now experienced 12 consecutive weeks of outflows, with year-to-date net outflows exceeding USD 64 billion. While there have been some tentative signs that investors are beginning to trim their duration underweights, the heightened market volatility and the murky economic outlook have resulted in continued cautious positioning.

    What does this mean for fixed income investors?

    As central banks continue to adjust to a new inflation regime, volatility is likely to remain elevated. Until inflation figures begin to stabilise investors should consider staying underweight duration within their portfolios and only lightly utilise their risk budgets. The outlook within fixed income markets is evolving rapidly, with the dominant narrative fluctuating in a matter of hours. In these fast-moving markets investors should be mindful of the benefits of active management in helping reposition portfolios rapidly in response to a changing economic landscape.

    About the Bond Bulletin

    Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

    Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.

    jpm_am_web_exp-icon_macroeconomic_b200_card_850x240

    Fundamental factors

    include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings and leverage metrics)

    jpm_am_web_exp-icon_stocks_g200_card_850x240

    Quantitative valuations

    is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors)

    jpm_am_web_exp-icon_stability_y200_card_850x240

    Technical factors

    are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum

    NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd (Co. Reg. No. 201120355E); in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Korea by JPMorgan Asset Management (Korea) Company Limited; in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan S.A.; in Canada for institutional clients’ use only by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc.

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