European stocks rose alongside US equity futures, and after falling the day before, global bonds stabilized as some of the commotion surrounding the Bank of Japan’s unexpected expansion of its yield trading band subsided. After falling to its lowest point since November 9, the Stoxx Europe 600 Index rose 0.82%. The S&P 500 futures increased by 0.51% on Tuesday, the first time the underlying index closed higher in four sessions.
This year’s escalating inflation threw off the fundamental investment strategy for portfolio balancing, which depends on a mix of 60.23% stocks and 40% bonds. 2022 saw a 17% decline in the strategy, its worst performance since 2008.
The decision by Japan to increase the upper limit of its 10-year bond yield has sparked bets that the BOJ will follow its peers in raising interest rates next year. The global stock of negative-yielding debt has decreased from a peak of $18.4T two years ago to approximately $686B due to rising yields.
For the first time since 2015, two-year Japanese yields have surpassed zero, and the benchmark 10-year yield is getting close to the new upper yield limit, forcing the BOJ to take action by buying bonds.
Treasury yields were unchanged after rising by 20 basis points this week.
However, for Japanese investors, the latest policy shift may change their calculus for the better. With the yields on domestic bonds suddenly more appealing, they may look to repatriate some of the $3T held in foreign equities and debt.
The EU Central Bank raised its key interest rate from 1.52% to 2% last week and announced plans to reduce its balance sheet by around 15B euros ($15.9B) per month from March 2023 to the end of the second quarter of 2023.
Last week, the Bank of England and the Swiss National Bank used similar language. They decided to raise interest rates by 50 basis points, mirroring the decision of the US Federal Reserve last Wednesday.
Stock futures in the United States were slightly higher early Wednesday morning.