The benchmark 10-year Japanese government bond yield slid to a seven-year low below 1.0 percent on Wednesday as a rising yen reinforced worries about the economy and persistent deflation.
JGB yields have dropped this year despite record levels of
debt issuance to the market, with bonds supported by strong
demand from domestic banks that have surplus cash due to sluggish corporate demand for bank lending.
The latest impetus for the JGB rally comes from a run of
disappointing U.S. data that has reinforced concerns the U.S. economic recovery is losing steam, sparking a renewed rally in U.S. Treasuries and pushing the dollar towards its lowest levels against the yen since 1995.
Against this backdrop, a 10-year JGB auction on Tuesday
attracted the strongest demand since the February 2005 tender,underscoring the strength of investor demand for JGBs.
'JGB yields seem to have room to drop further as growth and
inflation expectations are declining globally, which is helping to mask the risk arising from Japan's big public debt,' said Masamichi Adachi, a senior economist for JPMorgan Securities Japan.
The 10-year JGB yield slid as far as 0.995 percent , its lowest since August 2003 and marking a drop of 41 basis points from a peak just above 1.4 percent hit in early April.
'It broke the level faster than I had expected,' said Akito
Fukunaga, chief rates strategist for RBS Securities Japan,
referring to the 1.0 percent threshold.
'We could see some mixed trade for a while, now that a major
milestone has been reached. But I think pressure for yields to fall will eventually resume, helped by domestic demand for JGBs and the strength of U.S. Treasuries,' he said.
Fukunaga said the 10-year JGB yield may now drop towards 0.8 percent.
The 10-year yield later pulled back to 1.000 percent, but was still down 3.5 basis points on the day.
JGBs rallied broadly with 30- and 20-year yields also hitting seven-year lows.
Lead 10-year JGB futures hit a seven-year high of 142.28 and finished the morning session 0.27 point higher at 142.24.
The rise in JGBs came as the yen surged to an eight-month
high against the dollar of 85.40 yen. A drop to below
84.82 yen would take the dollar to a 15-year low against the yen.
JGBS NEARING 'DANGER ZONE'?
Nobuto Yamazaki, an executive fund manager for DIAM Asset
Management, said JGBs looked overbought, and the market had come close to pricing in slower growth in Japan and the United States.
'Japanese bonds are overbought and there is a risk of a
bounce in yields. I think 10-year JGB yields will move in a
0.95-1.15 percent range until the end of September,' he said.
In 2003, the 10-year JGB yield rebounded sharply after
sliding to a record low of 0.430 percent in June of that year.
The very next month the 10-year yield jumped to as high as 1.400 percent -- more than tripling from that record low.
When that so-called 'value at risk' shock occurred there was probably no particular trigger for the jump in yields, said Fukunaga at RBS Securities, adding that it was just a case of selling attracting more selling.
While JGBs do not seem to be at that stage yet, it will be
important to keep an eye on market positioning, Fukunaga said.
'After the drop below 1.0 percent, what will become important in determining whether the market has entered a danger zone are factors such as whether or not everyone in the market has put on long positions,' he said.
Worries about longer-term risks to JGBs persist despite the
latest drop in yields.
With Japan's savings rate in decline as the population ages,
fears are growing that the government may eventually have to rely more on foreign investors to fund its debt and that JGBs could face the risk of a sharp sell-off in the future.