• The Japanese government bond yield curve has been flattening in recent months, with very long maturities coming dangerously close to 0%. This is creating concerns amongst institutional investors with long-dated liabilities (insurance companies, pension funds)
  • Bank of Japan Governor Kuroda has argued that an excessive decline in super-long-term interest rates could negatively impact economic activity This has raised expectations that the central bank could shift to a policy of controlling the slope as well as the level of the yield curve.
  • This could influence bond yields abroad. In the eurozone it would intensify the debate about the impact of ECB policy on pension funds and insurers.

Fixed income investors are starved for yield. Reluctantly, they take more risk but, considering that everybody is adopting the same approach, this doesn’t stop yields from dropping below zero. This week, Greece has been able to issue 3 month treasury bills at a negative rate of 2 basis points. Back in August, Germany sold EUR 824 million of a new 30 year bond with an average yield of -0.11%1 . The phenomenon of declining bond yields is global because of the synchronised global slowdown but also because of international capital flows which create huge correlation amongst bond markets. Japanese institutional investors are actively contributing to this development by buying long-dated paper abroad on a currency-hedged basis. They are doing this because in Japan yields have been moving down as well.

The Japanese government bond (JGB) curve has been flattening in recent months, with very long maturities coming dangerously close to 0%. This is creating concerns amongst institutional investors with long-dated liabilities (insurance companies, pension funds). In a recent speech, Bank of Japan (BoJ) Governor Kuroda2 has shown that he is very much aware of the issue: “an excessive decline in superlong-term interest rates could lower the rates of return such as on insurance and pension products, and this may exert a negative impact on economic activity through a deterioration in people's sentiment.”

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