The Disconnect Between the Bond Market and Economy

  1. The bond investments cannot compensate for taking risks. It means the bond yield is too low. (the price is too high) Therefore, investors should/will sell bonds. (It will cause the yield to go higher and the price to go lower.)
  2. Because the economy does not get recovered, the government will conduct more aggressive policies. It means the bond yield will go lower, and the price will go higher. As a result, bond investments will make the capital gain. Therefore, investors should/will buy bonds.
  1. Nikkei index has increased from 10,000 to 23650 (from 2012 to 2020).
  2. However, since BOJ conducted the negative interest policy, the Japanese financial industry stocks underperformed because they could not find suitable long-term investments.
  3. More investors have sold bonds and left the market, and more BOJ has occupied the sovereign market. Now, BOJ is the largest creditor of the Japanese government. In 2020 March, BOJ held 44.2% of the Japanese treasury bonds. Meanwhile, foreign investors held only 12.9%.
  4. As time goes, #3 made BOJ difficult to find bonds they can buy. That was one of the main reasons why BOJ started the stock purchase program.

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