Wall Street Journal - 11/06/98
By GREGORY ZUCKERMAN and CHIKAKO MOGI
In a startling sign of the poor state of the Japanese banking system, the yield on Japan's six-month Treasury bills fell into negative
territory for the first time ever.
The situation is a rare one in the global bond markets. Although interest rates in Japan have been razor thin for several years, the
move to a negative interest rate marked a new low for the Japanese financial system. A similar negative yield for U.S. government
securities was seen during the Depression, amid worries over the stability of the U.S. banking system.
As with U.S. bonds, prices of the Japanese securities move in the opposite direction of yields. Rather than risk parking money in
Japan's fragile banks, investors are turning increasingly to the bond market. The rising demand for yen among those investors has
driven prices to the point that investors are overpaying, buying six-month bills at a price that is actually higher than the amount they
will get back six months from now.
Six-month Japanese treasury bills issued last month carry a negative yield of about 0.004% for small-lot deals among a limited
number of market participants, traders in Tokyo said.
"People would rather give their money to the government than give it to banks and get nothing back," said Thomas Sowanick, chief
fixed-income strategist at Merrill Lynch & Co. in New York.
Investors in six-month bills are now actually paying above par, or 100, for a Japanese Treasury, but will receive only par when the
security matures, in effect locking in a small loss.
Traders said some foreign investors are betting the yen will appreciate against other currencies during the six-month period, more
than offsetting the small loss they will incur by holding Treasury bills. "Foreigners are making the decision that the yen will
appreciate, and are willing to give up yield in order to participate in the currency," Mr. Sowanick said.
Just as important, U.S. and European banks have too much yen on their books, the result of recent foreign-exchange arbitrage
trades, and are willing to tie up the money in safe Japanese Treasury bills.
A sharp rise in Japanese banks' funding costs in overseas markets -- the so-called Japan premium, which incorporates the risk of
having shaky Japanese banks as counterparties -- has allowed foreign banks to raise yen funds at very low rates.
Foreign banks, awash with these cheaply available funds, are putting their money to work in yen investments with least risk and
highest liquidity, hence the interest in Japanese six-month bills. With the Japan premium expected to remain entrenched through
year end, when the availability of dollars generally declines because of foreign banks' year-end book-closing, traders said the return
on Japanese treasury bills could fall even more. |
