Skip to main content
logo
  • Investment Strategies

    Investment Options

    • Alternatives
    • Beta Strategies
    • Equities
    • Fixed Income
    • Global Liquidity
    • Multi-Asset Solutions

    Capabilities & Solutions

    • ETFs
    • Pension Strategy & Analytics
    • Global Insurance Solutions
    • Outsourced CIO
    • Sustainable Investing
  • Insights

    Market Insights

    • Market Insights Overview
    • Eye on the Market
    • Guide to the Markets
    • Guide to Alternatives
    • Market Updates
    • Guide to China

    Portfolio Insights

    • Portfolio Insights Overview
    • Alternatives
    • Asset Class Views
    • Currency
    • Equity
    • ETF Perspectives
    • Fixed Income
    • Long-Term Capital Market Assumptions
    • Sustainable Investing
    • Strategic Investment Advisory Group

    Retirement Insights

    • Retirement Insights Overview
    • Essential Elements of a Sound Retirement System
    • Building Better Retirement Portfolios
  • Resources
    • Center for Investment Excellence Podcasts
    • Insights App
    • Library
    • Webcasts
    • Multimedia
    • Morgan Institutional
  • About us
  • Contact Us
  • English
  • Role
  • Country
  • Morgan Institutional
    Search
    Search
    Menu
    You are about to leave the site Close
    J.P. Morgan Asset Management’s website and/or mobile terms, privacy and security policies don't apply to the site or app you're about to visit. Please review its terms, privacy and security policies to see how they apply to you. J.P. Morgan Asset Management isn’t responsible for (and doesn't provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the J.P. Morgan Asset Management name.
    CONTINUE Go Back
    1. Weekly Bond Bulletin

    • LinkedIn Twitter Facebook
    Weekly Bond Bulletin Banner

    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

    • Fixed Income
    • Bonds
    J.P. Morgan Asset Management

    • About us
    • Investment stewardship
    • Privacy policy
    • Cookie policy
    • Binding corporate rules
    • Sitemap
    Opens LinkedIn site in new window
    J.P. Morgan

    • J.P. Morgan
    • JPMorgan Chase
    • Chase

    READ IMPORTANT LEGAL INFORMATION. CLICK HERE >

    The value of investments may go down as well as up and investors may not get back the full amount invested.

    Copyright 2022 JPMorgan Chase & Co. All rights reserved.