Following its central bank’s venture into negative interest rates, Japan has sold its first long-term bonds with a negative yield.
After a $19.4bn auction, the 10-year benchmark bond was sold with a -0.024 percent average yield. This means that holders of this bond will be paying the Japanese Government for the privilege of lending it money.
As a result of Japan’s expansive monetary policy, which has led to interest rates falling below zero, Japan’s 10-year bond yield started to decline, dipping into negative territory. However, the recent sale marks the first time that such a bond has been sold at auction with a negative yield.
Yields on Japanese bonds had been steadily in decline, leading to a weaker demand for them. However, the most recent auction saw bids at 3.2 times more than the amount of the securities offered, marking the first rise in demand since December 2015.
Behind this seemingly counter-intuitive demand for negative yielding bonds is speculators taking short positions. These traders are, the Financial Times noted, covering “short positions’ built-in expectation of the yield dropping into negative territory”.
Koichi Sugisaki, a fixed-income strategist at Morgan Stanley MUFG Securities, told the Financial Times that “going into the auction, most dealers believed that it wouldn’t make sense to investors to buy” at negative rates. As a result, “they took out short positions, and today’s auction would have seen them buying to short-cover”.
However, some major investors, such as pension fund managers, have largely stayed away from the auction, no longer seeing Japanese bonds as stable investment vehicles.