Global Bonds Entering New Abnormal as Japan Leads Yield Meltdown

Fed Feels Brexit Jitters as BOJ Holds Fire
  • World government debt in best start to any year since 1995
  • Treasury yields confounding December forecasts they would rise

Japanese, German and Swiss bond yields fell to records, as government debt around the world extended its best gains in two decades, with the prospect of Britain leaving the European Union boosting demand for havens.

QuickTake Negative Interest Rates

Federal Reserve Chair Janet Yellen fueled the rally by saying Wednesday slow productivity growth and aging societies may keep interest rates at depressed levels. Fewer Fed officials expect the central bank to raise interest rates more than once this year than they did three months ago, based on projections the central bank issued. The Bank of Japan said inflation in the nation may be zero or negative, while holding monetary policy unchanged.

The bond rally is sending benchmark 10-year yields to unprecedented levels in some countries. Japan’s tumbled to minus 0.21 percent. Australia’s fell below 2 percent. Germany’s plunged below zero. Even Switzerland’s 30-year yield briefly turned negative, as sub-zero yields, once considered unthinkable, are becoming more common.

‘New Abnormal’

“It’s the new abnormal,” said Park Sungjin, the head of principal investment in Seoul at Mirae Asset Securities Co., which oversees $7.7 billion. “The abnormal is normal now.”

Yellen signaled she’s also examining changes to conventional wisdom. In a press conference Wednesday, she spoke of a sense that rates may be depressed by “factors that are not going to be rapidly disappearing, but will be part of the new normal.”

Global Rally

Global government debt has gained 5.5 percent this year as of Wednesday, the most for any comparable period since 1995, according to Bank of America Corp. indexes.

The BOJ’s decision to refrain from making any changes gives officials room to examine the path of U.S. monetary policy, watch Britain’s vote on whether to leave the European Union and see the outcome of a Japanese election for lawmakers July 10.

“Uncertainty over Brexit has made the Japanese bond market vulnerable to a further slump in yields,“ said Tatsuya Ishizaki, a manager at Sompo Japan Nipponkoa Insurance Inc.’s investment & loan department in Tokyo. “Expectations for further easing at some point remain, making it difficult for Japanese yields to rise.”

Benchmark U.S. 10-year note yields fell one basis points, or 0.01 percentage point, to 1.56 percent as of 7:30 a.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in May 2026 rose 1/8, or $1.25 per $1,000 face amount, to 100 19/32.

The yield is within 20 basis points of the record low. It is also more than 100 basis points lower than the average forecast from analysts on Dec. 31, 2015, for it to stand at 2.60 percent by June 30.

The latest Fed comments have reduced the odds the U.S. central bank will raise interest rates at its next meeting in July, which will make it easier for South Korea to bring its own benchmark down, said Park Sung Woo, a fixed income analyst at NH Futures Co. in Seoul.

"Expectations for another rate cut within this year are growing,” Park said. “The market appears to be reflecting an additional cut already.” The Bank of Korea unexpectedly reduced its rate by 25 basis points to record low 1.25 percent last week.

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