Japanese bond yield falls to zero as investors look for safe haven

YIELDS on Japanese government bonds hit record lows this week as foreign investors looked for a safe place to park their money.

A stocks indicator in Tokyo. Yields in Japan are falling along with those in the US and Europe amid global growth fears.

YIELDS on Japanese government bonds hit record lows this week as foreign investors, concerned about lower oil prices, looked for a safe place to park their money.

The yield on the five-year government bond hit zero for the first time, while the benchmark 10-year yield fell to a record low 0.255 per cent.

Yields in Japan are falling along with those in the US and Europe, as a slide in oil prices heightens concerns about global growth and, in some markets, slowing inflation or even deflation.

As oil prices have spiralled downward, global equities have slumped, driving investors to seek safety in bonds, pushing down yields, which move inversely to prices. Yields on 10-year US ­Treasury notes on Monday fell to 1.91 per cent, the lowest in more than a year, and five-year German government bond yields are at negative 0.007 per cent. Takahiro Sekido, Japan strategist at Bank of Tokyo-Mitsubishi UFJ, cited the Swiss National Bank ’s decision last month to introduce negative interest rates on bank deposits, following a similar decision by the European Central Bank earlier in the year, as one factor behind the move into Japanese government bonds.

The Swiss bank’s decision caused some people to favour the yen over the franc, another traditional haven currency. “The negative rate on Swiss franc debt is a reason yen rates have been falling since the beginning of the year,” he said.

In this environment, Japanese bonds are winning a “least ugly contest,” traders and fund managers say.

“For reserve managers at foreign central banks and other asset managers who need to buy safe, short-term assets, Japanese government bond yields are attractive,” Mr Sekido said.

To be sure, the Bank of Japan remains the dominant force in the domestic bond market, buying ¥8 trillion ($82.9 billion) to ¥12 trillion a month of Japanese government bonds and driving yields lower as it seeks to flood the economy with cash to defeat more than a decade of deflation. Few investors are willing to bet against Japanese government bonds with the BoJ buying at that volume.

The central bank has been joined by foreign investors, who poured a net ¥8.7 trillion last year into medium and long-term Japanese debt, mostly government bonds, according to the Ministry of Finance.

That is the most in one year since 2007, and came despite rock-bottom yields and concerns about the nation’s towering public debt. In fact, the yield on the 10-year government bond has fallen from around 0.415 per cent a day after Moody’s Investors Service downgraded Japan’s sovereign credit rating early last month.

Still, it was uncertain that foreign investors will continue to buy at the same rate this year, said ­Makoto Noji, a strategist a SMBC Nikko Securities.

This week’s yield declines were mostly a reaction to declines in US Treasury yields as well as expectations for lower oil prices to hold down inflation in Japan, he said. Lower inflation is better for fixed-rate bond investors as higher prices eat into the value of a bonds’ fixed-rate payments and principal.

Another source of demand for Japanese government bonds may be fading. Last year, foreign investors lent dollars to eager Japanese investors using a cross-currency swap agreement, in which an investor lends in one currency and borrows in another.

Foreign investors put some of the yen that they borrowed via the agreement into Japanese government bonds, but this year demand for foreign currencies among Japanese investors has faded, at least for now, meaning fewer foreign investors may take advantage of such trades.