JGBs capped by Nikkei gains, 2-year yield slips below zero

TOKYO: Yields on Japanese two-year government bonds fell below zero for the first time on Friday as the central bank continued to struggle to reflate the economy, while most other issues were steady, with gains in Tokyo stocks capping longer-dated maturities.

Japan's three-month to one-year bill yields have already dropped below zero under the Bank of Japan's extensive monetary easing scheme, under which it has tightened supply by buying large amounts of short-term bills. The market saw it as a matter of time before the two-year yield, which reached zero percent last week, also dipped into negative territory. It touched -0.005 percent on Friday.

"Supply is scarce under the BOJ's large-scale buying, which have already driven yields in bills with maturities under one year into the negative. The phenomenon has spilled over into the two-years," said a trader at a domestic bank. "It appears foreign buyers, who had been purchasing bills, are venturing out into the two-years as well." December 10-year JGB futures were unchanged at 146.88 and the benchmark 10-year yield crept up half a basis point to 0.425 percent.

Demand from foreign investors like central banks and sovereign wealth funds, looking to diversify their investments with many of the shorter-dated debt euro zone yields already firmly below zero, have exacerbated the decline in short-term Japanese yields.

"Foreign investors, particularly European buyers, are seeing supply of debt at home tighten continuously. Purchases from euro zone buyers have been the trend this year.

They can opt to buy JGBs with short-term euro zone yields already in the negative," said Makoto Noji, senior fixed-income strategist at SMBC Nikko Securities in Tokyo.

In Europe, the two-year German bund yield has spent most of its time since August beneath zero, while in the Swiss government debt market even the five-year yield has gone negative.

The possibility of euro zone short-term yields falling even further if the European Central Bank decides to begin buying sovereign debt and risks of deflation in the euro zone in wake of declining oil prices are some of the factors behind such demand for JGBs, Noji said. US crude oil tumbled to a 4-1/2 year low on Friday after OPEC decided against cutting output.

The ECB, tasked with shoring up the euro zone economy and warding off deflation, is widely expected to eventually step up its monetary easing programme by buying sovereign debt.