Japan’s bond yields sink to record low

JAPANESE government bond yields sank to their lowest-ever level on Thursday, defying an upswing in US yields over the last week.

JAPANESE government bond yields sank to their lowest-ever level on Thursday, defying an upswing in US yields over the last week and demonstrating the Bank of Japan’s overwhelming influence on the market.

The benchmark 10-year Japanese government bond was yielding just 0.31 per cent in afternoon trading, meaning investors were willing to accept just above ¥3 of interest annually for every ¥1000 invested. The previous low yield of 0.315 per cent was set in April last year.

Yields on shorter-term Japanese government debt are even lower, or non-existent. On Thursday, the government auctioned two-year bonds and for the first time received a negative yield — in other words, investors were paying the Japanese government to take their money. The Finance Ministry sold ¥2.7 trillion ($27.6 billion) of two-year bonds for a yield of -0.003 per cent.

The Bank of Japan has unleashed two rounds of monetary easing to flood financial markets with cash, the first in April last year and the second in October this year. After the first round, the central bank was vacuuming up the equivalent of 70 per cent of newly issued bonds. Now it is cleaning up the equivalent of all new government bond issuance, although it always buys on the secondary market to avoid the impression that it is directly underwriting government debt.

The BoJ hopes to spark 2 per cent inflation and prod big investors to look to riskier assets, and by one measure it has succeeded: the Nikkei Stock Average has surged nearly 14 per cent since the October action.

Traders say that with the central bank’s dominant role in the Japanese government bond market (sometimes likened to a giant whale in a pond), many market participants are reluctant to bet on a rise in yields.

Japanese government bonds give investors little reward compared with US government bonds. The benchmark 10-year Treasury yielded 2.265 per cent as of Tuesday afternoon.

“External factors don’t matter much,” said Satoshi Yamada, senior quantitative analyst at SMBC Nikko Securities. “With the BoJ expected to keep steadily snapping up JGBs well into the next year, there is almost no chance of rates going higher soon.”

That is despite concerns expressed by some foreign investors that Japan’s government debt — which is more than twice the size of the economy — may be too large to handle. Moody’s Investors Service on December 1 downgraded Japan’s credit rating, citing concern over the ­nation’s ability to cut its budget deficit. The downgrade sparked a small rise in yields that was over in almost the blink of eye. Since then, yields have steadily moved downward.

“It wouldn’t be surprising to see the benchmark 10-year yield dip below 0.3 per cent,” said Mr Yamada, adding that such a fall could come into view sometime in the first half of next year before the US Federal Reserve moves to raise short-term rates.

“The fall in yields appears to be prompted by fresh moves from investors who need to buy at the end of the quarter or to make up for a decrease of JGB holdings in their portfolios caused by the Finance Ministry’s bond redemption this month,” said SMBC Friend Sec­urities chief economist Mari Iwashita. She said slow trading over Christmas might have exaggerated price movements.

The Wall Street Journal