The US Treasury sold $32B worth of 3-year notes and the yield on 10 year US dollar rose to a 14 month high of 2.21% as Bank of Japan's Kuroda announced that they are leaving Japan's stimulus program unchanged with rates at 0.10% and a monetary base target of 270T Yen. Analysts had hoped that the Bank of Japan would further lower the rates in an attempt to help quell worries, but instead they opted to keep the course steady potentially opening doors to tapering in QE soon.
Japan's decision to leave the status quo has rattled markets around the world, as investors fear that this is a sign that the lack of additional action by the Bank of Japan is an omen of the beginning of tapering of QE globally. European stocks were affected, the Stoxx 600 fell 1.2% to a two month low of 291.74, FTSE 100 lost 0.9% to close at 6340.08 and the French CAC-40 fell 1.4% to 3810.56.
Analysts predict 2.35% for the 10 year note end of year and 3% next year. The US is doing better growth wise, but global growth estimates show only 3.25%. Bond yields are going to make it hard to have the same double digit gains month over month that we have experienced for the past three years and this might cause investors to move out of the bond market and search for other markets to put their cash into (probably equities).
Although the yields are historically very low, investors have become accustomed to having the 10-year yields and are wary of changes to the upside. In the past couple of years the aggressive bond-buying program of QE has enabled investors to purchase and hold onto riskier bonds than they normally would, meaning that as the QE backdrop starts to fade, the investments quickly move out of the riskier bond areas.
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