{LONGTERMINVESTORS} Japan Gets Paid to Borrow for 10 Years as Auction Yield Negative

 
Japan Gets Paid to Borrow for 10 Years as Auction Yield Negative
2016-03-01 04:08:51.920 GMT


By Kevin Buckland and Shigeki Nozawa
     (Bloomberg) -- The Japanese government got paid to borrow money for a decade for the first time, selling 2.2 trillion yen
($20 billion) of the debt at an average yield of minus 0.024 percent on Tuesday.
     The sale drew bids for 3.2 times the amount of the securities offered, according to the Finance Ministry. Japanese government bonds of as long as five years in maturity sold at a negative average yield for the first time last month, after the Bank of Japan pushed yields lower across the curve with the announcement of negative interest ratesJan. 29.
     Demand at 10-year note auctions had been declining this year as yields continued their slide, even with the central bank having the scope to buy every new bond issued as part of its stimulus program. The previous benchmark note was yielding minus
0.07 percent. An auction of 0.3 percent 10-year paper on Feb. 2 had a then record-low average yield of 0.078 percent.
     "There are concerns about who would actually buy 10-year bonds with negative yields," Shuichi Ohsaki, the chief Japan rates strategist at Bank of America Merrill Lynch, said before the auction. "Even if you wanted to participate in the BOJ trade, you would have to hold onto the bond until it becomes eligible for the BOJ operation. And with the increase in volatility, it's a tough one to trade."
     Volatility in the world's second-biggest sovereign bond market spiked to the highest since June 2013 in February, according to the S&P/JPX JGB VIX.
     "In our view, 10-year yields have overheated," Barclays strategists Akito Fukunaga and Naoya Oshikubo wrote in a report Monday. The "auction does not look particularly attractive" in terms of relative-value trades, they wrote.
     The JGB yield curve was the flattest on record at the end of last week, under pressure from the BOJ's bond purchases, with the premium offered by 10-year securities over two-year notes narrowing to just 11.5 basis points.
     The central bank buys as much as 12 trillion yen of the nation's government debt a month.
     "There aren't that many bonds available in the market, and the feeling of a lack of supply has strengthened," said Souichi Takeyama, a rates strategist in Tokyo at SMBC Nikko Securities Inc., who said the average yield may well be below zero. "If investors sell bonds now after having bought them when yields were positive, there's the risk they won't be able to reinvest with positive yields later, so they're reluctant to let them go."

--With assistance from Saburo Funabiki and Naoto Hosoda. 

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