Global market turmoil in recent days has pushed down yields of government debt seen as safe, including debt of the U.S., Germany and Japan. The yield on 10-year Japanese government bonds fell to as low as minus 0.215% Tuesday, driven in part by foreign investors’ buying. The yield on 10-year U.S. notes was hovering around multiyear lows at 1.738%, according to Tradeweb.
Bond yields go in the opposite direction of prices.
In 2016, the Bank of Japan said it wanted to fix the yield on the 10-year bond at “around zero,” making that its prime policy target instead of asset purchases, as before. The goal was to keep interest rates low but not so low as to threaten financial institutions’ stability. Gov. Haruhiko Kuroda has said around zero could be as high as 0.2% or as low as minus 0.2%, and Tuesday was the first time the yield escaped that band.
Mr. Kuroda said recently, however, that he didn’t see the need to rigidly enforce the band, and the central bank underscored that flexibility by letting the yield fall below the range without any overt response.
Japan’s central bank has been trying to jolt the country’s underpowered economy by keeping a lid on interest rates over which it has control—including the yield on government bonds—so as to drag down real-world rates charged to businesses and home buyers. It has had some success in stimulating demand for loans.
In the Japanese debt market, where nearly 90% of government bonds are held domestically, overseas investors are one emerging force pushing down yields.
Japanese financial institutions often seek to swap their yen for dollars to make investments abroad. Non-Japanese banks or hedge funds may take the other side of such trades for a fee, leaving them with yen that they have to park in government bonds. The fees allow the non-Japanese institutions to profit even if they have to hold bonds with negative yield for a while.
Foreign investors usually park their yen in short-term bonds, but recently they have been buying longer-term bonds, where they see a more attractive yield, said Hiroshi Yokotani, regional head of portfolio strategy for Asia-Pacific at State Street Global Advisors in Tokyo.
The yield on 40-year government bonds, which stood at around 0.8% at the beginning of this year, fell as low as 0.29% this week.
“Foreigners have been constantly buying JGBs, but they are buying for short-term trading purposes,” which could raise volatility in the JGB market, said Naomi Muguruma, a market economist at Mitsubishi UFJ Morgan Stanley Securities.
For other foreign investors, growing pessimism about trade tensions and the global economy may encourage investment in the yen as a haven, said Ross Hutchison, Aberdeen Standard Investments’ Edinburgh-based global bond fund manager.
“When growth outlook is down, holding JGBs and yen could make sense for some bearish investors,” Mr. Hutchison said.
The yen hit a seven-month high this week against the dollar before giving up some ground Tuesday.
To get the negative yields back up to zero, the Bank of Japan could dump some of its government-bond holdings. However, people familiar with the central bank’s thinking said it was unlikely to do so because such a move would be seen as monetary tightening when investors are worried about the global outlook.
Daiwa Securities market economist Mari Iwashita said she expected the central bank to wait to see if the storm goes away.
“It would be impossible for the BOJ to forcibly stop yield declines because those who are driving down the yields—including foreigners—would continue to try the downside even if the BOJ intervenes,” Ms. Iwashita said.
SMBC Nikko Securities economist Koya Miyamae said he thought the Bank of Japan would intervene only if the 10-year yield approached minus 0.3%, the low hit in July 2016 a few months before it announced its zero yield target. When rates dip deep into negative territory, life insurers, pension funds and other institutions find it hard to make investment returns.
Write to Megumi Fujikawa at email@example.com and Suryatapa Bhattacharya at Suryatapa.Bhattacharya@wsj.com
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