Central banks' failure to communicate boosts bond yields

What central banks may have the world over is a failure to communicate.

Officials are struggling to spell out their visions for monetary policy, often amid a chorus of competing views. Chairman Ben S Bernanke is trying to manage expectations about when the US Federal Reserve will slow asset purchases and raise interest rates. Bank of Japan Governor Haruhiko Kuroda's reflation-push is backfiring by driving up bond yields. European Central Bank President Mario Draghi is dashing investors' hopes he once kindled for extra stimulus.

The muddied messaging already is roiling financial markets, threatening to undermine the confidence of investors, households and consumers and so undoing efforts by central banks to strengthen their economies. The opacity puts policy makers under pressure to improve the communication techniques they've been using to restrain borrowing costs.

"The purpose of central-bank transparency was to give markets clarity and reduce volatility," said Ed Yardeni, president and chief investment strategist at Yardeni Research Inc in New York. "Instead it's increasing volatility and been counterproductive. Clearly the back-up in bond yields and sell-off are disconcerting."

Bernanke will get a chance to clarify the US central bank's stance on June 19 when he holds a press conference after the policy-setting Federal Open Market Committee completes a two-day meeting. Rather than focusing on when the Fed will start reducing its bond buying, Bernanke probably will stress the how and why of such a step, said Michael Feroli, chief US economist for JPMorgan Chase & Co in New York.

Not tightening
Bernanke will "want to emphasise that a tapering of asset purchases is not a tightening of policy and isn't necessarily irreversible," said Feroli, a former researcher with the Fed board in Washington.

Bond prices have slumped since Bernanke told Congress's Joint Economic Committee on May 22 the Fed could scale back stimulus efforts "in the next few meetings" if the employment outlook shows "sustainable" improvement. He stressed that any decision would depend on what the economic data showed and that a move to reduce the pace of purchases would be delayed if recovery falters and inflation falls further.

His remarks came in response to a question from Representative Kevin Brady, a Texas Republican and chairman of the committee.

Bond vigilante
The dumping of debt is reminiscent of the waves of selling that took place in the 1980s, only back then investors were worried about fiscal, not monetary, policy. Yardeni coined the phrase "bond vigilante" to describe the financial institutions involved.

The yield on the 10-year Treasury note was 1.93 per cent the day before the committee hearing. It traded to a 14-month high last week before settling at 2.13 per cent on June 14 at 5 pm in New York, according to Bloomberg Bond Trader data. The sell-off in Treasuries has triggered convulsions in capital markets elsewhere, with the more than $40 trillion of bonds in the Bank of America Merrill Lynch Global Broad Market Index falling an average of 1.1 per cent since May 21 as of June 13.

"Central banks have given a sense of near total control, driving volatility and bond yields to historic lows and compressing risk premia," said Michala Marcussen, global head of economics at Societe Generale SA in London.