EU-Japan Bond Yields / Ketchup Bottle Effect

We have all got used to negative yielding bonds being commonplace within the EU, however that took a big step toward becoming a thing of the past last week as swathes of yields across the region turned positive as markets accelerated bets that the ECB would have to tighten policy to fight the record-breaking inflation. The futures market is now pricing a 50bp hike this year, taking the deposit rate back to 0% for the first time since 2014. On Friday German, Swiss and Dutch five-year rates went above zero.  

With Europe making up nearly 50% of the globe’s negative yielding securities, the mountain of debt that you must pay to hold is reducing rapidly. At the end of last week alone, the mount of negative-yielding European debt tumbled by nearly a third following the ECB’s meeting, the biggest ever single-day fall. At the height of the pandemic the peak was approximately EUR9.5tn, now standing at around EUR2.5tn.  

It is not only the EU where once unimaginable (in the last few years at least) positive yields are occurring. Japanese government 5-year JGB’s also went above 0% for the first time since 2016. This was in line with the 10-year JGB yield raising to its highest level since 29th Jan 2016, the then start of the Bank of Japan's negative interest rate policy (NIRP). Under the yield curve control (YCC) policy, which was pegged to the NIRP in the same year, the BoJ pinned the 10-year yields at zero percent, however, allows fluctuations of up to 25 basis points on either side of that. Lately there has been speculation that the BoJ may shift its YCC target from the 10 to the five-year JGB, which would in turn steepen the curve as an early step toward an eventual rate hike. 

Bank of Japan and a rate hike mentioned in the same sentence, who would have thought!

We also read that German industry is still waiting for the 'ketchup bottle effect'. Not something we had heard of before. Yesterday morning figures showed that German industrial production slowed by 0.3% in December, down from 0.3% growth in November, and weaker than the 0.5% rise forecast. Year-on-year was down 4.1% vs an eyed 3.6% decline. The construction sector was particularly weak, with production falling over 7% in December, with problems sourcing components, transport delays, high energy costs, staff shortages and of course Covid interference all taking their toll. However, according to the Global Head of Macro for ING Research, things are about to get better due to the ketchup bottle effect. That being; ‘Remember the glass ketchup bottle that you shake and tap all you want with no result until suddenly it all comes flooding out and your food is smothered in ketchup? Under the surface of today’s headline data, the bottle has started to drip’. 
 
Fixed Income Team