As we all know, that's patently not been the case. Central bankers, failing in their duty to encourage economic growth and target inflation and/or unemployment, have resorted to ever more creative and extreme measures, the latest of which are negative nominal interest rates. Meanwhile, the bond market marches to its own beat, sometimes challenging the status quo, maybe getting burnt in the process, raising up policies to ridicule.
This year is no exception and today we focus on US interest rates as the Fed was the first to attempt a (measly 25 basis point) rate rise late last year. Because their control is greatest at the front end of the yield curve, it's not surprising that since mid-2013 a very gentle upward-sloping trend has propelled two-year Treasury note yields from a low at 0.20 per cent to a high at 1.10 per cent in December. Then in January yields slumped to 76 basis points, 58 in February, before rallying back to 100 mid-March. A recent large bearish engulfing weekly candle late March hints that a new peak in rates is in place; there is a good chance we will now drop back to 0.55-0.60 per cent.
US 30-year Treasury bond yields have been doing something similar, usually with bigger swings as there is more room for manoeuvre at the long end of the curve. From a record low yield to redemption at 2.45 per cent in 2012, and posting yet another new but brief record low at 2.25 per cent at the start of 2015, we formed a new interim high point at 3.25 per cent last summer; wild swings indeed. A slightly lower high at 3.15 per cent late 2015 and this month potentially another one at 2.75. This may sound low but keep in mind that the dividend yield on the FTSE 250 index is currently 2.68 per cent. Although small, a similar bearish engulfing candle at the 50 per cent retracement resistance level adds weight to this chart point. The 2.45 per cent level should now act as a magnet.
Treasury Inflation Protected Securities (Tips) were snapped up, too, partly because investors worry that the Fed might get sloppy about meeting its inflation target. With a coupon of just 0.75 per cent, the one maturing in 2042 scrambled up from 91 cents per 100 nominal to over 95.5 last week.
British investors have seen their gilts react in a similar way, underlining the interconnectedness of top-quality paper - very much a truly global market. The benchmark 50-year Index Linked gilt (maturing 2068) started the year at £158 per £100 nominal, well above par because of the RPI-based inflation-proofing provided - as well as an annual coupon of a paltry 0.125 per cent. Trading over £186 it provided a quarterly return of 17.75 per cent. You can see why professional fund managers and especially the insurance industry are so keen on these. And backstopped by central banks in times of quantitative easing.
