July 6, 2016 / 6:55 AM / 2 years ago

JGBs enter uncharted waters as 20-yr yield hits negative, banks hurt

TOKYO, July 6 (Reuters) - Japanese government bond prices rose to lifetime highs on Wednesday as negative yields spread to 20-year bonds, with the Brexit vote exacerbating a flight-to-safety bid that has crunched incomes of banks, pension funds and other Japanese investors.

The 20-year yield fell to as low as minus 0.005 percent , having declined more than 0.9 percentage point since the Bank of Japan made a historic shift to negative rates in late January, in addition to its massive bond buying programme.

With 40-year government bonds, the longest tenure on offer, also yielding just above zero percent, Japan is in line to becoming the only country after Switzerland to have all government bonds yield at negative levels.

On Tuesday, the 50-year Swiss government bond yield fell below zero percent.

“The reason is clear. The BOJ is increasing the holding of JGBs by 80 trillion yen per year when JGBs increase only by 30 trillion yen,” said Hidenori Suezawa, fiscal and markets analyst at SMBC Nikko Securities.

Yields on Japanese government bonds have been falling despite all the economic and demographic challenges confronting the nation.

Compounding a tricky situation for policymakers is the perceived safe-haven status of yen-denominated assets, which is driving more demand for JGBs especially as Britain’s shock vote to leave the European Union spreads turmoil in financial markets.

Japan has one of the highest level of debt in the world with its public debt at about 230 percent above its GDP. The economy has shrank five out of the last ten quarters despite massive fiscal and monetary stimulus.

And its low birth rate means it will likely lose 15 million people, or about 12 percent of its population now, by the time the 20-year bonds matures in 2036, which is likely to strain the already heavy debt burden.

Fears that investable bonds may disappear from the country hurt Japanese bank shares, which fell more than 3 percent to their lowest levels since late 2012, with Mitsubishi UFJ Financial falling over 4 percent.

“Globally banks and insurance companies are doing badly especially in countries with negative rates. While there are concerns about Brexit, the fundamental problem is how they can make profits under negative interest rates,” said Hisashi Iwama, senior portfolio manager at DIAM.

Despite the hit to banks, many market players expect the BOJ to unleash additional stimulus as soon as at its next policy review later this year as the yen’s gains and concerns over Brexit threaten to tip the economy back into recession. (Reporting by Hideyuki Sano; Editing by Shri Navaratnam)

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