Ice, we have already been to negative rate land in the Land of the
Rising Sun check out WSJ article below:
November 6, 1998
Japan's Six-Month T-Bills
Have a Negative Yield
By GREGORY ZUCKERMAN and CHIKAKO MOGI
Staff Reporters of THE WALL STREET JOURNAL
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.
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