Winter is Coming: Turn Up the Central Bank Heat!

Government bond 10-year yields in the major markets have rebounded to new highs for the year since mid-year. The move has been quite pronounced since early September. Prior to this, longer maturity bond yields have remained range-bound for much of the past year.

Focus on the gradual normalisation of global monetary policy has been behind this recent move and puts the spotlight squarely on the central banks as we start the annual IMF meetings. A growing number of countries are operating at unemployment rates below pre-crisis levels, though inflation remains below most central banks’ targets. We present a “Central Bank Thermometer” to help identify the likely leaders and laggards in policy tightening.

The global background and our valuation framework support a short bias in global bonds. The principal focus of an absolute return approach is to discern relative value opportunities, however, rather than to take significant market-directional risk. With this in mind, our thermometer shows that it has started getting hot in a number of countries, and with the current global economic picture intact it will likely get hotter for more. In our view, this will lead to greater differentiation across countries. Close attention to Central Bank communication and guidance remains key, and this week’s IMF meetings may shed further light on current thinking.