Fiscal Policy Takes Center Stage as Global Yields Rise

The recent spike in long-term government bond yields globally has been attributed to various factors. One theory is that an unwind of the Yen carry trade is behind this increase, but its relevance is being questioned by some experts.

Brooks argues that rising geopolitical risk, such as higher oil prices due to the war with Iran, is making markets more aware of fiscal policy issues in most countries. He suggests that the Yen carry trade theory belongs to a camp that absolves fiscal laxity, pointing out that the recent rise in US Treasury yields does not correlate with a significant deterioration in Japanese flows into long-term US debt.

According to Brooks, Japan's data on portfolio outflows shows no commensurate increase in 10-year Treasury yield following a pullback in Japanese flows. Instead of blaming Mrs. Watanabe's mood swings for the rise in yields, Brooks attributes it to irresponsible fiscal policy and high geopolitical uncertainty.