Treasury bond yields have experienced some interesting movements around the world. However, I, Jason Galanis, believe what is going on in Japan is insane.
The most interesting movements recently occurred in the Japanese market, where Treasury note yields turned negative for the first time in about five years.
Treasury note yields in Japan went negative last month, right after the European Central Bank became the first major monetary authority to allow rates to hit below zero levels. The three month Treasury note yields were at minus 0.08 percent as early as October 23, while the six month security saw a yield of minus 0.05 percent.
And, interestingly enough, investors are actually making money by buying three month notes and selling them to the Bank of Japan. According to financial analysts in Japan, they’re able to continue doing this even if the yields are negative.
Earlier this month, some speculation spurred concerns about whether the current events would even be possible. Then, the Bank of Japan didn’t buy all of the 3 trillion yen worth of bills they sought to acquire from the market.
That spurred concerns that the central bank would increase buying of longer-term bonds. At the start of October, the central bank stated they would buy 3.5 trillion yen worth of notes, considered a record purchase.
Analysts, on the other hand, have an idea about why yields suddenly turned negative. Since the Bank of Japan doesn’t have a lower limit for the note-buying operations’ yields, the yields themselves more or less turned negative due to that. Now, the decline in the yields will ‘play a role in supporting longer term debts.’
The Bank of Japan did continue to buy notes, particularly those with negative yields, in the last month. The note buying was one part of their goal to increase the [country's] monetary base on an annual basis, starting from 60 trillion yen to as much as 70 trillion.
The yields are expected to stay well below zero for the next few months, according to analysts.