Japan’s fiscal stimulus
Treasury yields rose on August 2 after the Japanese cabinet approved 13.5 trillion yen ($132.04 billion) in fiscal measures to boost the staggering economy. The new package includes cash payouts to low-income earners and infrastructure spending. The yen (FXY) strengthened against the dollar while the ten-year Japanese bond yield fell after the announcement. However, market participants were disappointed with Japan’s “modest” fiscal stimulus, as they were expecting a further cut in interest rates and an expansion of the bond purchase program.
BoE’s interest rate cut
Treasury yields fell after the Bank of England (or BoE) announced its bond-buying program and slashed interest rates for the first time since 2009. The BoE cut interest rates by 25 basis points to 0.25% and said it would buy 60 billion pounds ($80 billion) of government bonds over the next six months to support Britain’s staggering economy post-Brexit. It also said it would buy 10 billion pounds ($13.3 billion) of corporate bonds over the next 18 months. The BoE said it expects to cut the interest rates closer to zero by the end of the year. Sterling fell 1.6% against the dollar to 1.31 pounds at the end of the US trading day on August 4 while yields on the UK corporate bonds fell to the record low of 0.65%.
With the UK yields falling, the demand for US Treasury securities rose. US Treasury securities (SHY) are further supported by sub-zero yields in most developed nations.
In the next article, we’ll look at why Mohamed El-Erian and Bill Gross don’t foresee a rate hike in September.