One of the questions I have been asked most frequently over the past couple of years is: what happens if, and when, bond yields rise?
I am sure it is a question that has been repeated in many investment conversations since my previous column a fortnight ago.
Many who ask that question automatically assume, or want to assume, that the impact will be negative. They base this assumption on the persistent mood of doom and gloom that has prevailed since the darkest days of 2008-2009.
It is, of course, a very important question, because long-term bond yields are presumably lower than they would be in a “normal” world and, at some point, if the Western world ever returns to normality, they will rise. Needless to say, we have plenty of evidence from some countries inside the eurozone that they can also rise when things are not so normal.
But there is a big difference between the fact that yields are rising and the reasons behind it. Indeed, after a recent rise in Japan’s 10-year bonds to 1pc, the new Bank of Japan governor, Haruhiko Kuroda, argued that if Japanese growth returns to normal, then their economy and system can cope with yields at 3pc. He also pointed out that if yields were to rise without a full-blown recovery, then the consequences for the Japanese banking system would be quite challenging.