John Pattullo, Co-Head of Strategic Fixed Income, explains how the suppression of volatility by the US Federal Reserve during the Covid crisis has led to the Japanification of the US corporate bond market.

 Key takeaways:

  • Just as we saw in Europe, Japanification — which refers to Japan’s experience of persistently low interest rates, low inflation and low growth and where the central bank has completely supressed volatility — has now spread to the US and, at a remarkably faster pace.
  • As was the case in Japan, the US central bank’s suppression of volatility, together with its backstopping of investment grade (and, to a lesser extent, high yield) bonds, has created an almost idyllic environment to invest in corporate bonds.
  • With the collapse of the sovereign yield curve in the US, there have been large inflows into the US corporate bond markets in recent months, with overseas buyers as the major participants. Interestingly, given the unending search for yield, quality, well‑known investment grade names are now almost the new sovereign bonds or the new benchmark rates.

Note: this video was recorded on 14 August 2020.