�Less than Zero�
Japan�s negative yield bond explained
Bank of Japan�s negative interest rate has so far failed to have the desired effect of forcing banks to spend their cash, and some analysts suspect the central bank could push the rate even lower; that, in turn, could squeeze bond rates further
AFP
AFP, TOKYO: The yield on Japans benchmark 10-year government bond dipped below zero for the first time this week, offering the topsy-turvy promise of investors paying to lend someone money.
Sovereign bonds are a way for governments to raise cash for their spending plans, promising lenders (investors) a guaranteed incomeor yieldper year.
Like any other loan, borrowers usually have to pay interest on the money, and have to pay back the capital at the end of a fixed period.
Nearly all countries issue these bonds andlike other loansthe amount they pay generally depends on how risky lenders believe they are. If a lender thinks his money is very safe, he wont charge much interest; conversely, if hes worried the loan will go bad, he will charge a lot.
The United States pays about 1.7 percent, Germany pays around 0.2 per cent and hard-hit Greece must pay about 10 per cent on its decade-long notes to attract wary investors.
But Japans yield is now negative? Thats right, meaning anyone buying a bond (becoming a lender) has to pay for it.
For example, if an investor was to hand the government 100,000 yen ($875) for a 10-year bond at Tuesdays -0.035 per cent rate, it would actually cost him 3,500 yen, so he would only get back 96,500 yen.
Why on earth would anyone do that?
For the man in the street, the answer is that they wouldnt. They would be much better off stuffing their cash under the mattress.
But Japans government bonds are overwhelmingly held by institutions like banks and insurers rather than mom and pop investors.
And they would need a lot of mattresses to hide the cash theyre sitting on.
Bonds are generally seen as super safe investments where capital is all but guaranteed, even if they pay very littleor nointerest. This means they become very sought after during times of economic crisis such as that currently roiling global markets.
And in any case, the options for Japanese banks are limitedthe Bank of Japan (BoJ) has already reduced its benchmark interest rate to -0.1 per cent, so keeping cash in its vaults is expensive, and -0.035 per cent seems like quite a good deal. What will happen next?
The benchmark 10-year bond crept back into positive territory on Wednesday but could head south again.
But the BoJs negative interest rate has so far failed to have the desired effect of forcing banks to spend their cash, and some analysts suspect the central bank could push the rate even lower; that, in turn, could squeeze bond rates further.
However, the BoJ is the middle of a vast bond-buying scheme as part of a plan to stimulate the economy, so banks and insurance companies might want to gamble on the idea that the central bank will expand this plan
