This week saw a new bond market development when Japan’s 10 year bond traded at a negative yield for the first time. They closed on Tuesday at -0.027%. This means that investors are paying for the privilege of holding Japanese government bonds for the next 10 years and this is symptomatic of nervous investors exiting volatile equity markets and needing a place to park their money.
This is also the first time a G7 country has seen negative yields on 10 year bonds. Driving bonds to a negative yield shows that investors are fleeing risk-based assets and valuing safety over returns.
Japanese short-dated bond yields were already negative but the 10 year bond is considered the major benchmark borrowing rate and a negative rate is rare. Swiss 10 year bonds are presently around -0.34% but Switzerland is a much smaller market than Japan. According to the Nikkei Asian Review around 70% of all Japanese government bonds are now returning a negative yield.
Central banks around the globe have been flooding the market with easy money in an experimental bid to generate lending and economic growth. This has seen assets such as bonds, shares and property surge higher to bubble levels but the flood of money has not generated the level of growth required to move inflation significantly higher.
The problem seems to be that aggregate demand is not rising as households are paying off debt instead of spending. This is calling into question the issue of bank profitability and ultimately stability. A huge sell-off in bank shares is only exacerbating the problem.