Japan’s Bonds Hold Above 0% Even as More Debt Goes Negative
The amount of bonds with negative yields globally has jumped over 40% this year to almost $16 trillion.
(Bloomberg) -- Japan’s benchmark bond, once a landmark for negative rates, is holding above 0% even as the world’s pile of negative-yielding debt surges.
A perception that the Bank of Japan won’t cut rates, limited foreign demand and the potential for more debt sales will keep the 10-year yield from a sustained slide below 0%, according to analysts in Tokyo. The amount of bonds with negative yields globally has jumped over 40% this year to almost $16 trillion.
While bond yields globally have plunged during the pandemic, Japan’s benchmark is actually higher than a year ago. The spread between Treasuries and JGBs dropped by over 130 basis points in 2020 after the Federal Reserve slashed rates close to zero, and bets mount that the U.S. central bank could introduce a negative-rate policy.
“While markets are pricing in a possible future negative-rate policy in the U.S., there is no such move in yen bonds,” wrote Chotaro Morita, chief rates strategist at SMBC Nikko Securities Inc., in a note Thursday. Even if the probability of negative U.S. rates is low, speculation about it will keep pressure on Treasury yields relative to JGBs, he said.
The BOJ is unlikely to cut policy rates unless there is a huge change in the economy such as a rapid strengthening of the yen which puts downward pressure on prices, according to Morita. Together with the central bank’s interest-free lending programs, that makes investors unwilling to buy bonds with negative yields, he said.
Japan’s 10-year yield was at 0.015% on Friday. It briefly touched zero on Wednesday, dropping in sympathy with Treasuries that had closed at record lows on Tuesday.
“Their failure to drop below zero yesterday despite U.S. 10-year yields falling to their lowest since March underscores the difficulty of 10-year JGB yields declining,” Katsutoshi Inadome, a strategist at Mitsubishi UFJ Morgan Stanley Securities Co. said Thursday.
Limited foreign demand and the fear of more debt issuance to support fiscal measures are keeping 10-year Japanese yields above zero, he said.
Still, if 10-year Treasury yields -- currently around 0.53% -- were to approach 0.4%, the Japanese benchmark yield would turn negative, said Masahiko Loo, a fixed-income portfolio manager at AllianceBernstein Japan. Just not too far below zero, he added.
“It’s not so certain if there is demand for negative-yielding 10-year JGBs,” he said. “The downside limit is seen at around minus 0.05%.”
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