Japan 10-Year Yield Drops to Record, Below Negative Deposit Rate

  • BOJ bond-buying operation meets lowest demand on record
  • Forty-year debt sees no transactions at Japan Bond Trading

Investors at home and abroad can’t get enough 10-year Japanese government bonds, driving the yield to an unprecedented minus 0.135 percent.

Yields sank across the curve Friday after the Bank of Japan’s operation to buy long-term debt met the lowest investor participation on record, spurring what Bank of America Merrill Lynch strategist Shuichi Ohsaki called “panic buying.” The yield on the benchmark 2026 notes sank as much as 8 1/2 basis points Friday to below the minus 0.1 percent deposit rate introduced by the central bank last month, while that on 20-year securities tumbled more than 10 basis points to an unprecedented 0.29 percent.

Heightened investor demand is exacerbating the already dwindling supply of bonds in the market. Japanese investors are being forced to keep money at home despite record-low yields because of rising hedging costs that by one measure stands at the highest since 2009. Meanwhile, dollar-wielding global investors are able to use favorable cross-currency basis-swap rates to turn Japan’s 10-year yield into a fixed coupon equivalent of 2.6 percent.

Investors are buying shorter-dated debt “as there aren’t enough 30-year, 20-year bonds available,” said Tadashi Matsukawa, the Tokyo-based head of fixed-income investment at PineBridge Investments Japan. “It goes to show how the BOJ’s negative interest-rate policy is so strong.”

QuickTake Negative Interest Rates

Yields on 10-year government bonds fell 5 basis points to minus 0.10 percent as of 5:28 p.m. in Tokyo from Thursday, after touching the record low, according to Japan Bond Trading Co. The price rose 0.512 yen to 102.018.

Ten-year bonds look relatively cheap compared with other tenors, attracting buyers, Bank of America Merrill Lynch’s Ohsaki said.

Overseas investors bought a net 994 billion yen ($8.9 billion) in Japanese bonds during the week ended March 11, the most in a month, according to Ministry of Finance data on Thursday.

The BOJ’s operation Friday to buy bonds with 10 to 25 years to maturity had a bid-to-cover ratio of 1.35, about a third of the level last week.

Yields on Japanese government debt have tumbled since the BOJ announced Jan. 29 that it would start charging interest on some deposits held at the central bank starting Feb. 16. The amount of Japanese bonds in the market offering negative yields has doubled this year to exceed more than 600 trillion yen, driving up volatility in the local market and helping to bring down global yields.

Forty-year bonds haven’t traded on Friday at the nation’s largest inter-dealer debt broker after changing hands on Thursday for the first time this week.

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