The yield on 20-year Japan government bonds (JGBs) has fallen to a record low of 0.04% and the benchmark 10-year yield is further below zero at a negative -0.225% as investors seek “safe havens” following the shock outcome of the UK referendum on membership of the European Union (EU).
The vote for ‘Brexit’ has accelerated the fall in JGB yields, which began in January when the Bank of Japan (BoJ) announced negative interest rates. The country is following a similar path to Germany, Australia and Switzerland, where yields on benchmark 10-year bonds are all at record lows and Germany’s 10-year bund fell below zero this month.
Positive yields are becoming increasingly rare in the sovereign bond market. All JGBs of 15 years and shorter durations already offer negative yields; the unrest caused by the Brexit vote has raised expectations that the BoJ will announce further monetary easing and push yields even lower. Analysts have forecast that the 20-year yield could soon turn negative and the yields on 30- and 40-year JGBs could also reach zero or turn negative.
A Financial Times report suggests that Japan’s life insurance companies are still buying JGBs as they “no longer care about the yield” and are instead buying for the duration of the notes “effectively locking-in their cash as a minimum and assuming that things stay bad for a long time.”
The BoJ’s next policy meeting is scheduled for July 28-29, but the central bank’s governor, Haruhiko Kuroda said that it would take whatever action it deems necessary to counter the market turmoil caused by the Brexit vote. He declined to comment on speculation that the BoJ might call an earlier emergency meeting.
Meanwhile, the Japanese yen (JPY) has risen to long-term highs as it is considered a safe-haven asset. However, a strong currency runs counter to prime minister Shinzo Abe’s initiative to revive the Japanese economy.
The European Central Bank will extend its quantitative easing programme for nine months beyond next March, but scale back the level of bond buying from €80bn to €60bn a month.
The agreement, after three years of debate, raise questions on future investment demand, but Fitch Ratings doesnʼt anticipate major market disruption.
The European Commission fined Credit Agricole, HSBC and JPMorgan Chase a total of €485m for manipulating the price of the financial benchmark.
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