Japan sells 10-year bond at negative yield, sets G7 deflation landmark

By Jamie McGeever

LONDON/TOKYO (Reuters) - Japan became the first G7 nation to auction 10-year government bonds at a negative yield on Tuesday, but a relentless whittling down of global inflation meant investors still lapped up the highly rated debt.

Tokyo sold 2.4 trillion yen ($21.33 billion) of the benchmark paper with a yield of -0.015 percent at the lowest accepted price. The bid-to-cover ratio gauge of demand rose to 3.20 from 3.14 at the previous offering in January.

Analysts say other top-rated borrowers could also sell benchmark 10-year debt at negative yields if inflation and economic growth expectations remain as sluggish as they are now.

"Germany will get there as well, and yields will continue falling, going negative where they aren't negative," said Steve Barrow, G10 strategist at Standard Bank in London.

Germany is an obvious candidate, as market-based yields on its 10-year paper are around 0.10 percent and yields on all its bonds up to nine years are below zero.

Japan's 10-year yield fell below zero for the first time on the secondary market three weeks ago, again setting a G7 precedent.

The downward force of global inflationary pressures thanks to low oil prices, volatile financial markets, tightening financial conditions and slowing growth are all reasons why investors continue to buy bonds despite the low or negative returns on offer.

The value of government bonds around the world registering negative yields -- effectively a charge on lending -- is now $6.4 trillion, JP Morgan said on Friday. That's 27.2 percent of the bank's global government bond index.

The Bank of Japan introduced negative interest rates in January, starting to charge banks for some of their deposits at the central bank in a bid to spur lending and invigorate the economy.

On Tuesday Japanese government bond (JGB) yields languished at record lows, with the 10-year touching -0.070 percent and the 30-year 0.765 percent. JGBs, particularly short to mid-term paper, have continued to attract demand from investors such as domestic banks, which would rather park their money in debt than pay to deposit it at the central bank. But persistently low and negative yields could force some Japanese investors to look overseas for greater returns.

"Institutional investors who want 10 years at negativeyields are few in number. So it remains to be seen if upcoming10-year auctions will attract as much demand," said Naomi Muguruma, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

But returns in Europe are shrinking too.

Yields on all Swiss bonds out to 20 years maturity are negative, and the European Central Bank is expected to ease policy further next week, extending its quantitative easing program and cutting its -0.20 percent deposit rate even further below zero.

($1 = 112.5200 yen)

(Reporting by Jamie McGeever; Additional reporting by the Tokyo markets team and Saikat Chatterjee in Hong Kong; Editing by Jacqueline Wong and John Stonestreet)

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