Equities continued their strong start to 2023 last week, with the latest US inflation print stoking optimism with investors. However, there is a cautionary sting in the tale in the form of the guidance issued by some of the major US financials on Friday. As ever, more detail below.


Those keeping a keen eye on overseas bond markets have been closely watching the Bank of Japan over the last month, which has provided the latest major shift in global monetary policy. The BoJ have long kept the key 10-year bond yield in a tight trading range: If the yield fell below -0.25% they would sell bonds, increasing supply, prices go down, and the yield goes back up. The converse would take place when the yield hit +0.25%.


This range was widened out to -0.50% and +0.50% just before Christmas, in a move that stunned markets. The key rate has made headlines in recent days as it touched up to 0.53%. Essentially investors are testing the Bank of Japan’s resolve to keep the yield range in place. This is not the first time this has happened, and indeed the strategy has failed investors so many times in the last 20 years it has unfortunately been dubbed the ‘widow maker’.


The extraordinary thing about this is that in theory it’s absolutely ordinary. The massive market intervention in markets by central banks since the financial crisis is unconventional and one could argue bond yields freely moving through the mechanism of supply and demand is conventional. Whether the Bank of Japan agrees remains to be seen. All eyes on Tokyo as they meet this week.


As always, if you wish to discuss anything in this newsletter in further detail, please do get in touch.