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Japan Lines Up to Join Germany in All-Negative Yield Curve Club

Stephen Spratt

(Bloomberg) -- Japan’s sovereign debt market is in danger of joining Germany with negative bond yields across all maturities.

Yields in the Asian nation are already negative all the way out to debt maturing in 15 years, and buyers from home and abroad have been snapping up longer-tenor Japanese government bonds, adding to the downward pressure.

More sub-zero bonds in one of the world’s biggest economies would be a blow to everyone from mom-and-pop savers to global money managers, robbing them of a safe place to invest and encouraging more funds into risky assets. It would also be a huge set back for the Bank of Japan and its a high-stakes campaign to reflate the economy.

International investors are profiting by lending dollars for yen via currency forward contracts and plugging the proceeds into JGBs, while domestic players benefit from the slope of the yield curve by borrowing over a short time frame and putting the money into longer maturities where yields are higher.

“Investors are seeking to buy 30- and 40-year bonds while there are positive yields left,” said Tadashi Matsukawa, head of fixed-income at PineBridge Investments Japan Co. “They face the possibility that yields across all maturities will fall into negative territory.”

Given the limited amount of foreign bonds that offer positive yield to Japanese investors after hedging for currency moves, domestic funds willkeep buying JGBs and this could see the 20-year yield dip below zero for a while this month or next, said Takenobu Nakashima, a senior rates strategist at Nomura Securities Co. in Tokyo.

The next catalyst to send yields even lower may be the central bank, which could be forced to widen the target range for 10-year bond yields. While it’s said that a range of around 0.2% above and below 0% is acceptable, yields have already pushed into a gray zone at about minus 0.25%.

Governor Haruhiko Kuroda has indicated there is space to lower the target and as recently as this month his deputy Masayoshi Amamiya suggested the band could be widened. The board next meets to consider its monetary settings Sept. 18-19.

Foreign investors more than doubled purchases of Japanese debt in July from a month earlier, with bulk of purchases in the two-to-five-year bracket.

But global funds also bought more super-long bonds -- those due in 20 years or more -- amid speculation the worsening outlook for global growth will spur the BOJ to adjust policy.

Japan’s benchmark 20-year bond yielded just 0.085% on Thursday, down from 0.23% a month ago. The yield on 30-year and 40-year debt has also halved over the same period, to 0.19% and 0.21%, respectively.

The BOJ has sought to steepen the yield curve through modest, incremental reductions and tweaks to its regular bond market operations in recent months.

While any aggressive shift would run the risk of being taken as monetary tightening, triggering unwelcome gains in the yen, widening the trading range for 10-year yields, or simply removing the floor, appear to be options on the table for BOJ.

If this was done together with a small 10 basis points cut to interest rate cuts -- which is already priced into money market this year -- yields would make another move lower and all maturities could go negative.

(Updates paragraph three with context, paragraph six to include comments from Nomura.)

--With assistance from Chikako Mogi and Shigeki Nozawa.

To contact the reporter on this story: Stephen Spratt in Hong Kong at sspratt3@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Brett Miller, Shikhar Balwani

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