Japanification: Europe First and Now the U.S.

John Pattullo, Co-Head of Strategic Fixed Income, explains how the Federal Reserve’s suppression of volatility during the COVID-19 crisis has led to an almost idyllic environment to invest in corporate bonds.

Key Takeaways

  • Just as we saw in Europe, Japanification – which refers to Japan’s experience of persistently low growth, low inflation and low interest rates – has now spread to the U.S. and at a remarkably fast pace.
  • As was the case in Japan, the U.S. 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 U.S., there have been large inflows into U.S. corporate-bond markets in recent months, with overseas buyers as the major participants. Interestingly, given the unending search for yield and quality, well-known investment-grade names are now almost the new sovereign bonds or the new benchmark rates.