Japanese bond yields soar as oil drops

If things continue at this rate, most of Japan’s bonds may soon be paying negative rates.

It appears for all its economic problems (not to mention earthquakes) Japan is still considered a safe haven to park cash.

So, when oil ministers at the Organization of the Petroleum Exporting Countries (OPEC) failed to agree to an oil production freeze over the weekend, oil futures tumbled 6.8% pushing the Asian stock market down on Monday.

In a flight to safety, investors bought Japanese government bonds, sending their prices surging. This pushed the yields on 20- and 30-year bonds to all-time lows.

The 20-year yield fell to a record low of 0.275% and the 30-year yield sank about 3.5 basis points to 0.355%. The benchmark 10-year yield fell to minus 0.13%, its lowest since March 18 when it hit a record low of minus 0.135%, according to Bloomberg.

The bond market also is being indirectly impacted by a devastating series of earthquakes in the Kumamoto area late last week. Investors are speculating that the quakes, which have displaced over 100,000 and caused billions in damage, will force Japan’s government and central bank to consider more stimulus measures later this year.

Prime Minister Shinzo Abe hinted Monday that officials are putting together a stimulus package. Speculation is growing that Abe may also postpone implementing a controversial sales tax increase and call for snap elections.

On the oil side, OPEC’s meeting in Doha over the weekend fell apart when Iran declined to attend. In response, Saudi Arabia said every OPEC member, including Iran, must sign onto the deal to freeze production.

The failure of the Doha talks led to a drop among all the major commodity currencies, with the aussie, the loonie, the ringgit and the Russian ruble all falling at least 0.6%, according to Bloomberg. Investors snapped up the Japanese yen pushing it close to a 17-month high against the dollar. The yen’s rise 11% rise this year is significantly disrupting the government’s plans to pull the Japanese government out of its economic doldrums.

Over the past three years, the government made many efforts to weaken the yen to help boost exports. However, that strategy has hit a wall as the Group of 20 nations last week made it clear they were opposed to any new efforts to weaken the yen. This means, there is little to stop the currency from continuing to appreciate.

“The yen’s appreciation in the wake of the G-20 meeting is putting the [Bank of Japan] in a position where it has to do something,” Genji Tsukatani, Tokyo-based fund manager at JPMorgan Asset Management told Bloomberg “The [Japanese government bond] yield curve is flattening on views inflationary pressure is waning further, strengthening demand for super-long bonds. Investors are losing places to park money so they have to buy even as yields fall.”

Yields on bonds with maturities as long as 13 years are yielding less than zero since January, when the BOJ started charging lenders on some of their excess reserves held with the central bank.