YieldReport has written many ‘rinse and repeat’ headlines about bond market yields making record new lows over the past few years. It seems that bond investors around the world are caught in an Alice in Wonderland syndrome, questioning the very fundamentals of their investment philosophies as central banks continue to purchase more and more bonds to stimulate their respective economies and push bond yields lower and lower.
The Japanese bond market has now reached such ridiculously low levels it is distorting the investment landscape in previously unimaginable ways. This week, yields on 40 year bonds dropped below 0.30% as investors looked for anything with a positive income. Japan’s 2 year bonds reached a record low -0.265%. 10 year bonds traded at -0.126%.
Last week it was speculated that the Japanese government might consider issuing a zero coupon perpetual bond and this week the ruling party raised the possibility of a new ¥20 trillion bond issue (AUD$233 billion) to fund earthquake relief and boost a faltering economy. The Japanese government already holds around 30% of the bonds on issue through its QE bond purchases, tightening supply and forcing many of the Japanese pension funds to buy bonds regardless of their ridiculously low yields.
Japan’s debt is forecast to be around 250% of its GDP by the end of 2016. With a rapidly ageing population (average age 46.5 years), Japanese savers are being punished at the very time they are calling on their savings to fund their retirement. Nothing we have read or heard adequately explains how the Japanese government will unwind this mess and the time bomb of debt and ageing population cannot be too far off from exploding.