- Yield may drop to minus 0.1 percent this year, Sano says
- Possibility of bond auction failure slightly higher: Kubota
When he accurately called the drop in Japan’s 10-year sovereign bond yield to 0.5 percent, 0.25 percent and 0.1 percent over the past four years, strategist Kazuhiko Sano was often in a small group of bulls. Now his forecast of negative yields seems almost inevitable.
The Bank of Japan’s decision to pay negative interest on part of lenders’ reserves has already pushed yields below zero all the way out to eight years. Sano, chief bond strategist at Tokai Tokyo Securities Co., who started his run of accurate projections when the 10-year yield was closer to 1 percent in 2012, forecasts the yield will fall no lower than minus 0.1 percent this year, from a record 0.045 percent Wednesday.
The BOJ’s 0.1 percent charge on a portion of excess reserves set off a buying frenzy by making bonds more attractive than cash again for financial institutions. Investors may become more reluctant to sell bonds to the central bank, which has a goal of purchasing as much as 12 trillion yen ($100 billion) a month of debt to stimulate the economy, Sano said.
“You can’t fight the central bank,” Sano said. “When the volatility is high and you let go of the bonds, you will lose. It’s important to keep holding them.”
The central bank’s operations to buy short-term debt are becoming less popular as yields sink. Its offer to buy 70 billion yen in notes with a year or less to maturity generated 115.2 billion yen in offers for a bid-to-cover ratio of 1.64, the smallest since December 2014. That was below the 3.48 average since the BOJ started its current easing policy on Oct. 31, 2014.
“Banks can’t unleash their bond holdings now,” said Hiroyuki Kubota, an independent financial analyst who previously was a research manager at Fisco Ltd. in Tokyo. “Negative yields boost mark-to-market prices but if banks take profits now, they have to put the proceeds in reserves that may be subject to a negative deposit rate. Liquidity may dry further and become tight.”
The BOJ’s negative rate will be imposed on reserves worth about 10 trillion yen to 30 trillion yen initially and apply only to new deposits, according to people familiar with knowledge of the matter. The change will take effect on Feb. 16 and is similar to programs at some central banks in Europe, according to the monetary authority.
While the BOJ’s minus-rate strategy is making banks reluctant to pare their holdings, it will also make other investors such as life insurers reluctant to enter the market because yields are low and volatility is high, Kubota said.
The expected price volatility for Japanese debt over a 60-day period soared by 1.15 percentage points to 2.68 percent on Friday, the highest level since July. It was the biggest jump since 1999, according to data compiled by Bloomberg.
“Volatility is rising in 30- and 40-year zones,” said Tadashi Matsukawa, the head of fixed income investment in Tokyo at PineBridge Investments Japan. “Institutional investors can’t hold assets that are exposed to rising volatility. The curve is steepening.”
Negative yields also increase the possibility that the Ministry of Finance’s bond auctions won’t attract enough bidders, according to the independent analyst Kubota. The last failure of a benchmark 10-year debt auction occurred in September 2002 as the market lost confidence in the nation’s fiscal and monetary policy. The MOF announced Wednesday in Tokyo that it is canceling the Feb. 5 sale of 10-year fixed-rate notes aimed at retail investors because of low rates.
“The probability of JGB auction failures has risen slightly,” Kubota said. “The market could end up becoming one where dealers simply buy from the MOF and sell to the BOJ. But if yields drop deeper into negative territory, even those dealers may withdraw from bidding, leading to auction failures.”