Central banks losing credibility with traders

More and more, bond traders are drawing the same conclusion — central bankers globally are coming up short in their attempts to combat the world’s economic woes.

Even after hundreds of interestrate cuts and trillions of dollars in quantitative easing, the bond market’s outlook for inflation worldwide is approaching lows last seen during the financial crisis.

In the US, Europe, UK and Japan, those expectations are now weaker than they were before their respective central banks began their last rounds of bond buying.

That’s leading investors to write off the US Federal Reserve’s chances of raising interest rates this year and increase their bets that it will tighten less than policy makers forecast in the years to come.

Speculation has also increased that the European Central Bank and Bank of Japan will need to step up their quantitative easing in the face of deflationary pressures, despite statements to the contrary from their own officials.

“There’s a lack of faith in monetary policy — you’ve thrown the kitchen sink at it, you’ve cut rates to zero, you’re printing money — and still inflation is lower,” said Lee Ferridge, the head of macro strategy for North America at State Street. “It leads to a risk-off environment.”

Recent economic reports have renewed calls for major central banks to do more. Consumer prices in the euro region unexpectedly fell, deflation re-emerged in Japan, while wages in the US stagnated yet again.

Those worries have caused investors to pile into haven assets such as Treasuries and German bunds in the past month.

That’s driven down government bond yields in developed markets to just 1 per cent, or within 0.2 percentage point of an all-time low, according to index data compiled by Bloomberg. Those on the US 10-year note ended below 2 per cent for the first time since April, closing at 1.99 per cent on Saturday.

As a result, investors are demanding virtually no additional compensation to hold 10-year Treasuries instead of investing in a series of shorter-term notes.

Traders expect inflation to average less than 1.5 per cent a year over the next decade.