Government Bond Trading Quiet As Investors Wait On Central Banks

Government bonds seem to have entered the summer doldrums as yields in the U.S., Europe, and Japan stay in a narrow range. A meeting this week of the European Central Bank governing council and next week of the Federal Open Market Committee may rattle that lethargy, but policymakers will be at pains to avoid any disruption.

The ECB will have to walk a tightrope to seem dovish enough to maintain monetary accommodation, but hawkish enough to be alert to the dangers of inflation. The council will be reviewing the pace of its bond purchases under the emergency pandemic program, but it’s anybody’s guess whether they will change anything.

Germany has been experiencing uncharacteristic political turmoil. The environmental Greens party surged ahead in polls after naming the 40-year-old Annalena Baerbock as chancellor candidate, but enthusiasm has waned after missteps by her and the party.

Sunday’s gains in a state election by Chancellor Angela Merkel’s Christian Democrats are seen shifting the momentum in the race in favor of their chancellor candidate, Armin Laschet, who looks bland and old-fashioned next to Baerbock, but heads the country’s most populous state and its biggest political party.

The yield on Germany’s 10-year bond, which had crested above minus 1% in May, is now within a whisker of minus 2%, as the country settles back into more traditional politics.

The Federal Reserve is widely perceived to be off the hook for talking about tapering its bond purchases after last week’s job report came in below expectations and eased investor concerns about a runaway economy forcing the Fed’s hand on monetary policy.

The yield on the benchmark 10-year Treasury note was virtually flat on Monday, at about 1.57%, after falling several basis points on the job news Friday, as investors felt the Fed could relax and not hurry to make any changes in monetary policy.

Even when Treasury secretary Janet Yellen, the former Fed chair, said over the weekend that higher interest rates spurred by a rise in inflation would be a “plus” for the economy, investors took it in stride. After all, she was hawking President Joseph Biden’s ambitious $4 trillion spending plans—which may turn out to be a pipe dream as opposition builds even among Democrats.

Senator Joe Manchin, the maverick West Virginia Democrat, effectively shut down any quick actions when he said over the weekend that he will not support a much-touted bill mandating expanded voter access because passing it on a strictly partisan basis would divide the country even further.

With 50 Republican senators unified in opposition, Democrats would need every one of their 50 votes to have Vice President Kamala Harris break the tie, so Manchin’s defection is a deal-breaker.

Manchin also reiterated his opposition to diluting the Senate filibuster, which means 10 Republicans would have to join with all the Democrats to advance legislation. If the filibuster remains in place, Democrats would not be able to enact Biden’s full agenda.

Senate Parliamentarian, Elizabeth MacDonough, finally found the nerve to stand up to Senate Majority Leader, Chuck Schumer, and rule out using the budget reconciliation technique an indefinite number of times to ram through legislation in “the ordinarily deliberative Senate.” She said budget reconciliation—which is exempt from filibuster—should be reserved for extraordinary circumstances.

All this may sound arcane, but it is designed to foster compromise and bipartisanship, which, as Yellen might put it, would be a plus for the country.

The consumer price index coming out this week could potentially upset investors, but it would have to be alarmingly higher than the forecast 4.7% gain year-on-year to affect trading.

The Japanese government bond market has come to a standstill. Most bonds are not even traded in the absence of any market-moving data, and tight yield curve control from the Bank of Japan has contained any possibility of a breakout.

Inflation, in contrast to the U.S. and Europe, is declining in Japan as the vaccine rollout has been slow, and COVID-19 infections are surging again.