F.I.R.S.T.: Bond Market Outlook

April 19, 2013

Robust private-sector demand and†improvements in the U.S. housing and manufacturing sectors continue to be supportive,†and emerging market fundamentals remain attractive.
-Christine Hurtsellers, CIO Fixed Income, ING
-Mike Mata, head of multi-sector fixed income, ING
-Matt Toms, head of U.S. public fixed income, ING

Amid heightened political uncertainty in Europe and subdued global growth expectations,
global investors owe Hiroki Kuroda a big domo arigato for his pledge to inject about
$1.4 trillion into the moribund Japanese economy by the end of 2014. The newly appointed
BOJ governorís unprecedented plan to buy Japanese government bonds, ETFs and other
financial assets represents the boldest step yet in the central bankís fight against the forces
of deflation; as a percentage of GDP, the program makes even Ben Bernanke look like
a tightwad. While Kurodaís actions treat the traditional sound-money wisdom of his
predecessors with the same respect that Godzilla treats downtown Tokyo, financial markets
have thus far responded positively to the BOJís stimulus and to the resulting weaker yen.

¶ There tends to be a positive correlation between central bank balance sheet expansion
and financial market performance, as the flood of liquidity incites investors to search
for more attractive currency-hedged yields. The impact of the BOJís announcement
was no different from that of the liquidity jolts previously provided by the Fed and ECB,
spurring the outperformance of longer-duration U.S. Treasuries, U.S. agency mortgagebacked
securities, higher-yielding emerging market currencies (like the Brazilian real) and
sovereign debt for certain European countries (such as France).

¶ The Bank of England, meanwhile, likely is on the verge of another QE announcement, and
the ECB has felt increasing pressure to provide further accommodation thanks to big trouble
in little Cyprus and the lack of a functioning government in Italy. Recent Fed rhetoric suggests
QE in the U.S. will continue at least through year end in the absence of a large upside
surprise from labor markets, which disappointed profoundly in their latest release.

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