Bloomberg
Bank of Japan easing has raised the prospect of the nation’s first bond auction in which the government is paid to borrow.
Two-year yields dropped to a record minus 0.04% in the secondary market on December 19 after the central bank pushed forward with a plan to increase the amount of Japanese government bonds it purchases at an annual pace of ¥80tn ($665bn). While the average yield at a treasury-bill auction dropped below 0% in October, a negative figure at a two-year offering today would be the first for the nation’s coupon-bearing notes.
BoJ policy is driving down borrowing costs even after Prime Minister Shinzo Abe’s move to delay a planned sales-tax increase caused Moody’s Investors Service to cut Japan’s credit rating on December 1. Negative yields could hurt investors who have to hold JGBs, according to SMBC Nikko Securities, as trading stays limited before the three-day New Year’s Holiday.
“With yields already negative in the secondary market, it’s possible the average auction yield falls to negative at the two-year auction,” Makoto Noji, the senior debt strategist in Tokyo at SMBC Nikko, said on December 19. “The negative side effects may get bigger if minus yields become more widespread.”
The central bank on October 31 said it would target an ¥80tn expansion in the monetary base, up from ¥60tn to ¥70tn before, and extend the average maturity of its debt purchases. Switzerland last week imposed its first negative deposit rate since the 1970s.
The boost in BoJ buying is tightening the supply of debt available to investors as net JGB issuance stays at about ¥40tn per year, Kenro Kawano, chief bond strategist for Japan at Morgan Stanley MUFG Securities Co, said on December 17. The amount of central bank purchases of maturities between more than one year and up to five years jumped to as much as ¥7.2tn from about ¥3tn.
“Until inflation rates rise firmly, markets will continue to be dominated by BoJ moves,” he said. “Solid downward pressure on the medium zone will spill over to compress longer maturities where extra yields are still left.”
Two-year yields dropped below zero for the first time after a government report on November 28 showed gains in consumer prices slowed for a third straight month. Stripped of the effect of April’s sales-tax increase, core inflation was 0.9%, compared with the central bank’s 2% target.
“Yields continue to be pushed lower as the bond supply gradually tightens,” said Takafumi Yamawaki, chief rates strategist in Tokyo at JPMorgan Chase. “It’s hard to imagine that the two-year auction yield will be positive.”
Since the day before the BoJ’s October 31 meeting, the spread between two- and 30-year yields has narrowed 30 basis points to 133, the lowest since April 2013, according to data compiled by Bloomberg. Kawano said 30-year yields could go to as low as 1.2% in 2015. A basis point is 0.01 percentage point.
The so-called yield curve will probably keep flattening, according to Sachin Gupta, executive vice-president, and Tomoya Masanao, head of portfolio management for Japan, at Pacific Investment Management Co
“Given the size and extent of the BoJ’s ongoing quantitative easing operations, and despite the decline in yields to very low levels, we believe this trend is likely to continue,” they wrote in a report this week.