The UK government got a taste, last year, of what happens when you rub up the bond markets the wrong way.
Gilts – UK government bonds – sold off aggressively when, in September, the then-chancellor Kwasi Kwarteng announced a huge raft of unfunded tax cuts.
The Bank of England was forced to ride to the rescue and, amid the punishment beating administered by the markets, the government was forced to unwind most of Mr Kwarteng’s initiatives.
Received wisdom in the markets was that the UK was the optimum size for the so-called ‘bond vigilantes’ to take on.
The US Treasury and the European Central Bank (ECB) were previously too big to take on, it was assumed, as was the Bank of Japan (BoJ).
That latter assumption is now being challenged. It appears that the bond vigilantes – who hold governments and central banks to account by selling their bonds and, in the process, pushing up borrowing costs – have saddled up again.
In their sights, remarkably, is the BoJ.
Last year, when the likes of the US Federal Reserve, the ECB, the Bank of England and others were busily raising interest rates, the BoJ was sticking with its ultra-loose monetary policy. The BoJ’s main policy rate remains at the -0.1% to which it was cut in February 2016.
Nor, unlike the likes of the Fed and the Bank of England, has the BoJ sought to unwind the emergency asset purchases – Quantitative Easing (QE) in the jargon – made during the last decade to stimulate economic activity.
However, once it owned more than half the bonds issued by the Japanese government, the BoJ realised it was approaching the limits of what QE could do so it embarked on something called ‘yield curve control’.
This saw it set targets on where the yield (an implied borrowing cost) would be on Japanese government bonds of various durations. The idea was to try to depress short term interest rates – making…
