The world enters Super Central Bank Week as bond traders look for sell signals from policymakers' statements

Source: Global Market Broadcast

Some of the world's major central banks may provide investors with new reasons to sell government bonds this week, as policymakers are forced to face the risk of inflation shocks triggered by wars.

The Federal Reserve, European Central Bank, as well as the central banks of Japan, the UK, and Canada are all set to announce their rate decisions, meaning that all G7 countries will have policy decisions that will affect economies accounting for nearly half of the global economic output.

Although investors expect these central banks to keep interest rates unchanged, the market remains alert to signals released by officials such as Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde—for example, concerning worries about the US-Iran conflict causing the largest disruption ever to crude oil supplies and raising concerns about inflation threats.

If there are any concerns or speculations suggesting potential policy tightening in the coming months, it could have a negative impact on government bonds. In recent weeks, as traders seem to have shifted their focus away from war, stock and credit markets have rallied but government bonds have lagged behind other assets.

The Bank of Japan will hold its meeting on Tuesday, the Federal Reserve and Bank of Canada on Wednesday, and the European Central Bank and Bank of England on Thursday. Amy Xie Patrick, who is among the many investors preparing for a busy week and operates a dynamic yield strategy at Pendal Group—which has outperformed 91% of its peers over the past five years—commented on the situation.

"What do central bankers have left to lose by making hawkish remarks now?" said Xie Patrick, who has already exited all duration exposure this month. "There is an oil crisis and unclear inflation prospects. The bond market also wants to see a reversal like the stock market, but yields are staying put until things become clearer."

Although the prices of some major assets have already adjusted back to pre-war levels or even higher, short-term yields from the US to the UK remain elevated.

Traders attempting to profit from bond price volatility have also largely been disappointed. Since the start of this month, the average daily movement in yields of one- to three-year government bonds has been about 2 basis points, lower than 4 basis points in March.

Stephen Miller, former head of fixed income at BlackRock Group in Australia, said this situation could change in the coming week.

Central banks, wary of renewed price pressures, are reluctant to repeat the mistake made during the pandemic by asserting that inflation was transitory—when inflation stayed high and caught many by surprise, clearly a miscalculation by policymakers. Even as concerns about economic growth intensify, this experience may lead decision-makers to remain cautious.

"Central bank comments could stimulate bond shorts and push up bond yields," said GSFM advisor Miller.

While there are concerns about short-term inflation, if rising prices and geopolitical tensions begin to suppress demand, both markets and central banks may ultimately need to shift their focus to economic growth. Such a shift could eventually put pressure on both official and market borrowing costs.