Nikkei falls 918 points, bond yields go negative as investors flee for safest havens

Reuters, Bloomberg, Kyodo

Demand for safety forced the yield on Japanese government debt below zero on Tuesday for the first time. Stocks tumbled in Tokyo and elsewhere in Asia as stability concerns sent investors stampeding to only the safest of safe-haven assets.

As fear overwhelmed greed, yields on longer-term Japanese bonds went into negative territory, the yen surged to a 15-month peak and gold reached its most precious point since June. Uncertainty in Europe’s eurozone helped to fuel the unease.

Finance Minister Taro Aso characterized recent movements as “rough,” something of an understatement as the Nikkei 225 average nosedived 5.4 percent to close at 16,085.44.

There was turmoil on other stock markets that were not closed for the Lunar New Year holiday. Australian shares hit a 2½-year closing low.

Institutional investors buy bonds for a variety of reasons, but when demand is high the yield falls. The unprecedented negative yield reflects the feeling that Japanese government debt is a safe place to park cash in times of uncertainty.

The plunge came as global financial turmoil and the Bank of Japan’s adoption of negative interest rates have driven demand for the notes, seen as particularly secure compared with other nations’ debt. A flight to haven assets also drove global yields to the lowest in more than a decade.

Japanese bonds are climbing as sovereign securities rally worldwide. Global stocks have dropped almost 10 percent this year on concern growth is slowing in China, and as slumping oil prices undermine policymakers’ efforts to revive inflation.

“It’s almost like a panic,” said Hideo Shimomura, the chief fund investor in Tokyo at Mitsubishi UFJ Kokusai Asset Management. “The flight to quality is exaggerated.”

The yield on Japan’s benchmark 10-year government bond touched minus 0.035 percent. It is the first time a Group of Seven nation’s 10-year government bond yield has turned negative.

With the BOJ buying government bonds from financial institutions in its monetary easing operations, “Bond prices are on the rise amid a sense of relief that the BOJ would purchase them at higher prices,” a major brokerage house official said. Bond prices move inversely to yields.

Lower interest rates are believed to be pushing down mortgage interest rates and facilitating loans to companies.

Mizuho Bank said Tuesday it will lower its long-term prime lending rate by 0.10 percentage point to a record-low 1 percent from Wednesday.

In the currency market, by far the biggest mover was the yen, long considered a safe haven given Japan’s position as the world’s top creditor nation.

The dollar dived as far as ¥114.205 in Tokyo trade, having been above ¥121 just a week ago, while the euro fell as much as 1 percent to ¥128.31.

“The yen by default looks to be the safest,” said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “Soft U.S. data is raising speculation that the pace of rate increases will be slow. Investors have already stocked up on dollars, so they don’t need more.”

Aso said Tuesday the government will continue to keep watch on the dollar’s plunged.

“It is clear that recent moves in the market have been rough,” Aso told reporters. “We will continue to carefully monitor developments in the currency market.”

Aso also said some of the possible effects of the central bank’s negative interest rate decision could mean lower mortgage payments and a reduction in deposit interest rates.

“From the standpoint of the government and the BOJ, we will steadily steer the economy to aim for exiting from asset deflation, while giving consideration to the government bond market,” Aso said.

The finance minister pledged to pursue policies aimed at “exiting from asset deflation” while carefully monitoring the market for government bonds.

He said the government would also monitor the impact of the negative interest rate on the financial institutions’ bottom lines.

  • Liars N. Fools

    Abenomics, RIP. Or maybe just R.

  • boonteetan

    Such abrupt drop of Nikkei is unusual, it could be a prelude to an unprecedented shrinking economy that would hurt millions of Japanese. Wonder why Abe’s 3 arrows don’t seem to work.