Negative example: why is the yield of Japanese government bonds turned negative

Safe Harbor

Morning on February 9 the ten-year bonds of the government of Japan for the first time in history left in a negative zone. They are now traded with a yield of 0.03% on the piece. According to Reuters, this is the first in the history of such a case with ten-year securities participating countries G7. Bonds with a maturity of 10 years are the most traditionally revealing of government securities, it is considered a key benchmark, reflecting the state of the public debt.

The rest of Japanese government bonds went into negative territory before the middle of November two years, and since the end of January — five years. Stock paper of the Japanese government with a maximum maturity up to 30 years — are still kept in the green zone, but the yield on them is also near multi-year lows, about 1.05% on the paper.

On the background of the loss of the bond the value of the yen against the dollar rose to the highest level since November 2014 to trade in the 14:00 GMT on the level 115,36 yen per $1. The leading trade index of Japan Nikkei fell by 5.4%, approaching a three-week minimum.

The yields for all four types of Japanese bonds tumbled on January 29. The fall was a direct result of the introduction by the Bank of Japan with negative interest rates (-0,1%). According to the plan of the controller obtained in this way funds will be invested by the government in the economy, contributing to inflation. The consumer price index for 2015 has grown in Japan is only 0.2%.

JPMorgan expert and former official of the Bank of Japan Masamichi Adachi explains that investors are now massively invested in the more expensive yen “as in a calm Harbor in a period of global economic uncertainty”. But this violates the plans of the Japanese regulator to restore financial stability: a rising rate of the national currency has a negative effect on inflation, and on the revenues of exporting companies, causing a fall in the value of their shares.

The word for the fed

To Japan the negative rates on excess reserves was introduced in Sweden and Switzerland in late 2014. In the summer of that year, the ECB introduced a negative Deposit rate overnight for the Eurozone as a whole. As these regulators, the Bank of Japan is committed to making local currency debt less attractive to investors, to stabilize the financial system. “The decision by the Japanese regulator to follow these examples will lead to a further decline in the yields on leading markets of government bonds, told the Financial Times the economist the S&P Sophie Tahiri. — Meanwhile, the search for investors the yield spread from Japan to Europe.”

With the decline in the yields of Japanese bonds increases the yield on “junk” securities issued by troubled European countries. The yield on ten-year bonds of the Greek government on February 9, grew up to 10,28% apiece, and Portugal — to 3,44%, the highest since the autumn of 2014. The yield on US Treasury securities and the Federal Republic of Germany, which, like Japanese, are considered to be reliable, is falling. On 9 February, it stood at $ 1.69% and 0.22% respectively.

Thus, even leaving from the Japanese market, market players continue to invest in other stable economies, whereas demand for “junk” bonds (inversely proportional to their yields) remains low. Experts warn that sooner or later this will lead to the establishment of negative rates and negative bond yield on remaining the largest markets.

For example, in December the former head of the U.S. Federal reserve Ben Bernanke urged his successors to consider carefully the possibility of setting negative interest rates. Forbes columnist John Mauldin does not believe that the fed will be back to lower rates (down to negative values) this year, although I do not exclude that officials of the American regulator had already started to seriously discuss such a step, its reasons and possible consequences.

This week in Washington opens the regular meeting of the Federal open market Committee (FOMC) of the U.S. Federal reserve, which is engaged including setting interest rates. This will be the first meeting of the Committee after the December rate hike, which marked a return to “traditional” financial regulatory policy.

This time analysts believe that the actions of Tokyo to seriously affect fed policy. The Standard Chartered Bank expects a return of lower rates at the February meeting of the FOMC. Analysts JPMorgan, Glodman Sachs and S&P cut its forecasts for the number of decisions on raising interest rates in 2016, with four such decisions until two or three in the most optimistic scenario.