Bondholders pay Japanese government to lend it money

Japanese government bond yields held near record lows on Tuesday after yields at an auction for 10-year bonds went under zero for the first time, a phenomenon that is likely to dent demand for risk assets.

As a broadening swathe of the fixed income markets falls into negative territory, the strong demand at the bond auction signals the growing unease among investors at the unprecedented measures taken by global central banks such as pushing interest rates into negative territory to stimulate growth.

The benchmark 10-year JGB yield touched 0.075 per cent. A fall below that level would take the yield to a new record low. The 30-year yield plumbed a fresh all-time low of 0.835 per cent. The bid-to-cover ratio, a gauge of demand, at Tuesday’s 2.4 trillion yen ($21.33 billion) 10-year sale rose to 3.20 from 3.14 at the previous offering in January. The yield on the lowest accepted price was minus 0.015 per cent, marking the first time that the yield went below zero at a 10-year auction.

This was the first time that 10-year bonds were sold with negative yields and investors worry this could further reduce demand for risky assets. Emerging market assets and equities have got off to a poor start this year, as investors flocked to the safe haven of gold and government debt while flattening yield curves across markets indicate the world is skirting with recessionary risks. “The negative debt auction in

Japan signals broader headwinds growing for the bond and the credit markets and investors need to be careful in choosing bonds rather than chasing beta,” said Manu George, investment director, Asian fixed income at Schroders Asset Management. Euro zone government debt yields have also slipped to record lows under very loose monetary policies while the yield curve in Japan up to 10-year maturities are in negative territory.

For now, the JGB market drew relief from the outcome as some had feared negative auction yields could crimp demand for the new 10-years. Still, uncertainty remained regarding whether stable demand for long-end JGBs could be sustained at future auctions. “The auction results were stronger than expected, helped by participants who aim to sell the issues at Bank of Japan’s debt buying operations,” said Naomi Muguruma, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. “But institutional investors who want 10-years at negative yields are few in number. So it remains to be seen if upcoming 10-year auctions will attract as much demand under negative yields.”

In a bid to spur lending and invigorate the economy, the Bank of Japan introduced negative interest rates in January, meaning banks are now charged for some of their deposits at the central bank. Despite the low yields, JGBs, particularly those of short to mid-term durations, have attracted steady demand from investors such as domestic banks which would rather park their money in debt than pay for their deposits at the central bank.

Reuters