Japan Negative Yield Spurs Race to Dump Worst Performers

Yields that are threatening to turn negative in Japan are giving bond investors added incentive to look for higher returns abroad.

The yield on three-month government bills fell to minus 0.002 percent July 10 in pre-auction trading, though it climbed to 0.018 percent after the sale. Japanese investors bought 3.75 trillion yen ($37 billion) of debt abroad in May and June, the biggest purchases this year, based on Ministry of Finance data.

Japan’s government bonds returned 1.3 percent in the past six months, the least of any debt market in the world, as Bank of Japan Governor Haruhiko Kuroda’s unprecedented easing anchored coupons. Japan’s biggest banks and the Government Pension Investment Fund are cutting holdings of the debt and looking overseas. Many institutional investors can’t escape as their fund guidelines don’t allow them to buy abroad.

“Japanese interest rates are low for everything, not only government bonds but corporate bonds or derivatives,” said Naruki Nakamura, the head of fixed income in Tokyo at BNP Paribas Investment Partners Japan Ltd., which manages the equivalent of $665.5 billion in assets globally. “Some investors are going out to earn higher yields.”

Bill yields on July 10 dropped below zero in what’s known as when-issued trading, which takes place as investors trade a security before it is actually sold at auction. The next day, 10-year yields touched 0.53 percent, the lowest since April 2013, when borrowing costs dropped to a record 0.315 percent.

The benchmark bond, untraded as of 10:27 a.m. in Tokyo today, closed with a yield of 0.535 percent on July 11, according to Japan Bond Trading Co.

Price Stagnation

The BOJ buys about 7 trillion yen of government bonds a month to lower borrowing costs and overcome deflation that’s wiped out much of Japan’s growth over the past 15 years. Its unprecedented purchases have paralyzed the debt market, sending a gauge of 60-day price volatility to a record low last month. Twenty-year futures didn’t trade on July 8.

Investors get negative 316 basis points on 10-year bonds after adjusting for inflation, the biggest deficit on record based on data compiled by Bloomberg back to 1985. The consumer price index rose to 3.7 percent in May, the highest since 1991, boosted by higher utility charges and a sales-tax increase.

That has investors such as Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., considering U.S. and U.K. bonds.

Seeking Yield

“Japanese investors are looking for yield,” Suzuki, whose company manages the equivalent of $59.3 billion in assets, said by phone on July 11. “The U.S. 10-year absolute level is not very satisfying, but it’s attractive compared to Japanese government bonds.”

Yields on 10-year government bonds closed at 2.52 percent in the U.S. and 2.60 percent in the U.K. on July 11.

Investing abroad may be risky, said Teruyoshi Sotome, a Tokyo-based senior bond strategist at Mizuho Securities Co.

“Treasuries and U.K. gilts have relatively high yields, but you never know if their yields will go up,” he said by phone on July 10.

Ten-year bond yields are forecast to end this year at 3.03 percent in the U.S. and 3.19 percent in the U.K., according to the weighted average of analyst estimates compiled by Bloomberg.

Traders in the U.S. are adding to bets the Federal Reserve will raise rates next year as the economy improves. Bank of England Governor Mark Carney told the Belfast Telegraph last month he sees a path of “limited increases” for rates.

No Alternative

BNP Paribas’ Nakamura said investors like himself are restricted by fund rules to investing domestically.

“They just endure the low yield,” he said by phone on July 10.

Government Pension Investment Fund will seek to limit the impact on domestic bond prices when reducing holdings, the head of its investment committee said last week. Paring debt “on the quiet” before announcing changes in target weightings would be ideal, Yasuhiro Yonezawa said in an interview.

Japan’s biggest banks dumped long-term government debt for a second month in May after selling a net 5.7 trillion yen of the securities in April, the most on Japan Securities Dealers Association’s record dating back to 2004.

“Because of BOJ policy, the expected return from JGBs went down and investors turned to foreign bonds for higher returns,” Kazuto Doi, a Tokyo-based portfolio manager at Western Asset Management Co., said by phone on July 10. If U.S. 10-year yields rise to 3 percent, “it’s a good chance to buy,” he said.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Yumi Ikeda in Tokyo at yikeda4@bloomberg.net

To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net; Sandy Hendry at shendry@bloomberg.net Naoto Hosoda, Pavel Alpeyev

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