Wed, Mar 09, 2016 - Page 14 News List

Negative bond yields drag on Japanese finance sector

HEADACHE:Almost three-quarters of Japanese bonds offer no returns, leading one analyst to say that a typical bond investor would not want to touch the market

Bloomberg

The amount of Japanese government bonds in the market offering negative yields has doubled this year to more than ¥600 trillion (US$5.3 trillion) and that is a major headache for the finance industry.

After the Bank of Japan’s (BOJ) surprise decision on Jan. 29 to implement negative interest rates on some deposits, almost three-quarters of total government bonds would offer no returns or even burn a hole in balance sheets if bought now.

The government got paid to borrow ¥2.2 trillion for a decade for the first time at an auction last week, and set a record-low 0.8 percent coupon for an auction of about ¥800 billion of 30-year securities yesterday.

“The only thing that the BOJ has been consistent in doing is driving down yields — and the impact has been enormous — but it’s unclear whether that will boost inflation expectations and revive the economy,” said Yusuke Ikawa, a strategist at UBS in Tokyo. “It’s getting harder and harder for investors.”

BOJ Governor Haruhiko Kuroda on Monday said he cannot deny the adverse effect on bank earnings of his stimulus, even as he reiterated it can help spur inflation to a 2 percent target.

With maturities extending to 10 years offering negative yields, investors need to take ever-greater risks in longer-maturity bonds. More than two-thirds of respondents in a quarterly BOJ survey last month said market functioning had deteriorated, as a gauge of volatility spiked to the highest since June 2013.

Ten-year note yields yesterday slid to a record minus-0.085 percent in Tokyo. Those on 30-year bonds sank to an unprecedented 0.68 percent a day earlier, with the premium over two-year notes dropping to an all-time low of 85.1 basis points.

Japan yesterday sold 30-year bonds at an average yield of 0.765 percent, an all-time low, as a gauge of demand rose to the highest since May 2014.

The 10-year note sale on March 1 had a record-low coupon of 0.1 percent, and an average yield of minus 0.024 percent.

While market participants have expressed concern over bond market functioning, the Bank for International Settlements issued a report over the weekend saying that negative interest rate policies in use by central banks around the world have worked through their respective systems in much the same way as positive rates.

“The experience so far suggests that modestly negative policy rates are transmitted to money market rates in very much the same way as positive rates are,” the report said. “Anecdotal evidence suggests banks seek to avoid negative rates by either extending maturities or lending to riskier counterparties.”

Japanese loan growth slowed slightly last month and deposits accelerated — the opposite effect sought by the central bank as it began its negative interest rate program on Feb. 16.

In the final quarter of last year, the average monthly volume of government bonds traded by dealers for clients fell to the least in BOJ data to 2004, at about ¥15 trillion.

“Yields will continue to fall and the curve will continue to flatten under pressure from negative rates and quantitative easing,” said Shuichi Ohsaki, the chief rates strategist at Bank of America Merrill Lynch in Tokyo. “Trading volumes will become even thinner. A typical bond investor probably wouldn’t want to touch this market.”

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