What this chart shows
This chart shows the evolution over the past five years of 30-year Japanese Government Bond yields and corresponding 30-year Chinese Government Bond yields. During 2020, Chinese 30-year government debt traded at a yield-to-maturity of nearly 4%, which means CNY 1,000 invested over thirty years would be worth CNY 3,243 after compounding returns. Alternatively, investing JPY 1,000 at a 30-year rate of 0.5% would result in a value of JPY 1,161 over the same period. In percentage terms this means that a CNY investor in long bonds would have locked in a 224% return versus 16% for a corresponding JPY long bond investor. This situation has dramatically reversed now that Japanese yields are higher than corresponding Chinese securities.
Why this is important
After decades of zero interest rate policy by the Bank of Japan, we finally saw rate increases in 2024, taking the BoJ unsecured overnight call rate to 0.25%. Yield curve control, which effectively capped the upper bound of Japanese bond yields has also been amended to allow higher rates. Meanwhile, with ongoing macroeconomic challenges in China, interest rates have been lowered, and bond yields have also declined. This divergent policy may have far reaching implications for investors and valuation models for other asset classes. Over time, higher interest rates may provide support for the Japanese yen and reduce speculative funding strategies based on borrowing JPY. The implications for global markets are far reaching.
The global financial landscape during this period was shaped by central bank policies and economic resilience in the US, contrasted with challenges in Europe, China, and Japan. Inflationary pressures and mixed growth signals continued to influence market behaviour globally.
-
The S&P 500 hit record highs due to robust performance in tech stocks, with Apple and Tesla leading the charge. Investors focused on anticipated Fed decisions.
-
Fed officials hinted at potential rate cuts in December, supported by a solid jobs report showing 227,000 new jobs added, and an unemployment rate of 4.2% in November.
-
Inflation showed signs of persistence, particularly in housing services, challenging the Fed's 2% target.
-
The US trade deficit widened in October, and weekly jobless claims were stable, reflecting a resilient labour market.
-
Concerns arose over holiday spending trends, with muted forecasts for consumer spending growth in the run-up to Christmas.
-
The Bank of England maintained its interest rates amidst signs of slowing inflation and mixed economic signals.
-
The British pound fell against the dollar, reflecting concerns over sluggish economic recovery and global factors.
-
A drop in gas prices offers some relief to households as energy inflation eased.
-
The European Central Bank signalled no immediate changes to interest rates, citing stabilising inflation.
-
Data showed continued contraction in manufacturing, raising fears of an EU-wide recession.
-
Concerns over fiscal policies in France and Italy dampen investor sentiment.
-
Germany faces ongoing struggles with declining industrial output and stagnant growth.
-
China’s declining exports highlighted weaker global demand and trade tensions. New measures to bolster economic growth, focusing on the property and manufacturing sectors are being introduced.
-
Japan continues grappling with low inflation and stagnant wage growth despite government stimulus efforts.
-
Countries in Latin America and Africa faced renewed inflationary pressures and rising debt concerns.
-
India remained a bright spot, with strong GDP growth and robust domestic demand.
