Japan 2-Year Yields Drop Below Zero to May Low on Foreign Buying

Japan’s two-year yields fell to minus 0.02 percent for the first time in almost six months as declining yen funding costs for dollar-based investors increased the allure of the Asian nation’s sovereign debt.

Cross-currency basis swaps show dollar holders seeking to borrow yen for two years enjoyed the biggest discounts since November 2011 on interbank money market rates this month. The Bank of Japan saidit would buy a total of 1.2 trillion yen ($9.7 billion) in government debt from the market Wednesday as part of its plan to expand the monetary base at an annual pace of 80 trillion yen.

“The drop in yen funding costs is boosting foreign demand for debt up to the two-year zone,” said Shuichi Ohsaki, the chief rates strategist at Bank of America Corp.’s Merrill Lynch unit in Tokyo. “There seems to be some resistance when 10-year yields breach 0.3 percent, but there’s more room for yields to drop amid good supply-demand conditions.”

Japan’s two-year yield fell 0.5 basis point to minus 0.02 percent, the lowest since May 28, as of 2:05 p.m. in Tokyo, according to Japan Bond Trading Co., the nation’s largest inter-dealer debt broker. The price of the 0.1 percent note due in November 2017 climbed 0.01 yen to 100.238. The 10-year bond was unchanged with a yield of 0.30 percent. A basis point is 0.01 percentage point.

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