Politics 11 April 2013 It all seemed so easy, but then along came Italy and Cyprus Bond yields: watch out for the great rotation. Print HTML Watch out for the great rotation was the ubiquitous catch phrase as we entered 2013. Bond yields had become absurdly low, in many cases negative, in real terms. Equities were fairly valued and, with the major central banks of the world printing money like "no tomorrow", inflation would soon take off, reducing bond markets to rubble, whereas stocks would offer good inflation protection. What could go wrong-buy equities and sell bonds? It all seemed so easy, and by the end of January it all looked fine and dandy-equities were duly perky, and ten-year US Treasury yields had climbed over 2 per cent, from around 1.75 per cent at the end of 2012. Then, in February and March, along came Italy and Cyprus. Italian elections lead to complete impass and raised the possibility that back-tracking on fiscal reform would rear its forbidden head, and worse, it seemed likely that Eurozone policymakers were about to fire both barrels at their own feet, to paraphrase Dutch Finance Minister Dijsselbloem, using the Cyriot confiscation of bank depositors’ money as a ‘template’ to dress the balance sheets of Europe’s weaker banks. This all lead to a flight to safety in US Treasuries, so yields fell back again, their descent hastened by weak US employment figures. But now the landscape has changed again with the Bank of Japan’s, (BOJ), incredibly aggressive new quantitative easing policy-much bigger as a percentage of GDP than the US Federal Reserve’s programme. There is finally a chance that the Japanese economy will rise from 20 years of slumber, but there is also a great risk that other major central banks be unable to resist the peer group pressure to emulate the BOJ, by ramping up the scale of their own money printing. Hardly a world conducive to lower bond yields, maybe not even in Japan if the government and BOJ are successful and reach their 2 per cent inflation target. The US economy is already on a relatively robust recovery path, with an enormous corporate cash mountain about to be put to work in investment, now that the imagined dangers of fiscal cliff, debt ceiling and sequestration are receding, and the Eurozone political masters patently just as fanatically committed as ever to ensure the Euro’s survival. US animal spirits will make this soft patch very short and soon the down-leg for the bond market will resume in earnest. › A couple weeks in, the FPC is ALREADY calling for "drastic reform" Photograph: Getty Images Chairman of Saxo Capital Markets Board An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee. More of his work can be found here. Subscribe More Related articles An unmatched font of knowledge Leader: On capitalism and insecurity Cabinet audit: what does the appointment of Liam Fox as International Trade Secretary mean for policy?