Rate market divergence can only go so far — EIB
GlobalMarkets, is part of the Delinian Group, DELINIAN (GLOBALCAPITAL) LIMITED, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 15236213
Copyright © DELINIAN (GLOBALCAPITAL) LIMITED and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Rate market divergence can only go so far — EIB

EIB

The monetary policies of developed market central banks may be heading in different directions, but the extent to which rate markets can truly diverge is limited, according to the EIB. But the whims of central banks — imagined or otherwise — can still do harm and good to bond markets

eibbig
Courtesy EIB

Fears that the interest rates set by the world’s four major currencies will continue to diverge are overplayed, according to a senior official at the European Investment bank.

“While diverging rate paths in different geographies are not impossible, large international rate markets are so intertwined, that in reality there seems to be a limit to the extent that global rate markets can move in completely different directions,” Bertrand de Mazières, director general, finance at the European Investment Bank told Emerging Markets.

The central banks responsible for setting rates for the world’s four core currencies have never been so far apart in their policies since the financial crisis of 2008. The US Federal Reserve is in a rate rising cycle — albeit a very slow one — the Bank of England is embarking on another round of quantitative easing, the European Central Bank has added corporate bonds to its purchase programme and the Bank of Japan is attempting to control not just short term interest rates but long term ones too.

The BoJ’s attempt to steepen the Japanese government bond curve by keeping 10 year interest rates at 0% — an initiative introduced in September dubbed “yield curve control” — led to speculation that domestic Japanese investors might be tempted to refocus their purchases into onshore securities, possibly dampening demand for bonds from issuers outside the country.

But the interconnectedness of the global markets makes this an unlikely prospect, according to German development bank and major bond issuer KfW.

“The Japanese capital market is a strategic market for us and all groups of investors play an important role in our funding activities,” Günther Bräunig, member of the KfW executive board in charge of capital markets, told Emerging Markets. 

“Retail investors look for yield enhancement via Uridashi bonds, which are usually foreign exchange or Nikkei-linked, and the low yield environment fuels demand for these products. Institutional investors in Japan are very professional and look for portfolio diversification in all respects. Yield differentials therefore only play a limited role when it comes to their decisions.”

SELL THE RUMOUR?

But yield differentials do have a big impact in other areas.

This week, the Republic of Italy, despite concerns over the health of its banking sector and a constitutional reform referendum in early December was able to sell a €5bn 50 year bond, its longest dated benchmark ever. 

Less than five years ago, many in the market were concerned that Italy would have to join Greece, Ireland and Portugal in seeking a bail-out.

But nearly 370 investors placed more than €18.5bn of orders for Italy’s issue this week, suggesting that either the buyside is comfortable that Italy’s problems are not as bad as a few years ago — or, more likely, that the effects of quantitative easing have trumped all other concerns and have forced investors to grab yield where they can find it.

That proved true after rumours surfaced shortly after Italy priced its bond that the ECB might consider tapering its bond buying programme — which dented the price of Italy’s new bond in the secondary market. The ECB swiftly denied the claims.

Gift this article