- `Ten-year yields have overheated,' Barclays strategists say
- Sales of five-, two-year notes last month had negative yields
The Japanese government got paid to borrow money for a decade for the first time, selling 2.2 trillion yen ($19.5 billion) of the debt at an average yield of minus 0.024 percent on Tuesday.
The sale drew bids for 3.2 times the amount of the securities offered, the first increase in demand since an auction in December, according to the Finance Ministry. Japanese government bonds of as long as five years in maturity sold at an average yield below zero for the first time last month, after the Bank of Japan pushed yields lower across the curve with the announcement of negative interest rates Jan. 29.
Demand at 10-year note auctions had been declining this year as yields continued their slide, even with the central bank having the scope to buy every new bond issued as part of its stimulus program. The previous benchmark note was yielding minus 0.07 percent. An auction of 0.3 percent 10-year paper on Feb. 2 had a then record-low average yield of 0.078 percent.
“Demand was stronger than expected,” said Shuichi Ohsaki, chief rates strategist at Bank of America Merrill Lynch. “The outcome suggests there is ample demand before redemption of existing bonds in March.”
The benchmark 10-year bond yield dropped as low as minus 0.075 percent after the auction, matching a record. Yields on 20-year debt sank to an unprecedented 0.46 percent, while those on 30-year securities declined to an all-time low of 0.765 percent.
Volatility in the world’s second-biggest sovereign bond market spiked to the highest since June 2013 last month, according to the S&P/JPX JGB VIX. A BOJ survey of bond market participants between Feb. 8 and Feb. 16 showed 69 percent of respondents said market functioning has decreased from three months ago.
“In our view, 10-year yields have overheated,” Barclays strategists Akito Fukunaga and Naoya Oshikubo wrote in a report Monday. The “auction does not look particularly attractive” in terms of relative-value trades, they wrote.
The JGB yield curve was the flattest on record at the end of last week, under pressure from the BOJ’s bond purchases, with the premium offered by 10-year securities over two-year notes narrowing to just 11.5 basis points.
The central bank buys as much as 12 trillion yen of the nation’s government debt a month.
“There aren’t that many bonds available in the market, and the feeling of a lack of supply has strengthened,” said Souichi Takeyama, a rates strategist in Tokyo at SMBC Nikko Securities Inc., who said the average yield may well be below zero before the auction. “If investors sell bonds now after having bought them when yields were positive, there’s the risk they won’t be able to reinvest with positive yields later, so they’re reluctant to let them go.”