Japan 10-year yield drops to record

Investors at home and abroad can't get enough 10-year Japanese government bonds, driving the yield to an unprecedented minus 0.135 percent.

Yields sank across the curve Friday after the Bank of Japan's operation to buy long-term debt met the lowest investor participation on record, spurring what Bank of America Merrill Lynch strategist Shuichi Ohsaki called "panic buying." The yield on the benchmark 2026 notes sank as much as 8 1/2 basis points Friday to below the minus 0.1 percent deposit rate introduced by the central bank last month, while that on 20-year securities tumbled more than 10 basis points to an unprecedented 0.29 percent.

Heightened investor demand is exacerbating the already dwindling supply of bonds in the market. Japanese investors are being forced to keep money at home despite record-low yields because of rising hedging costs that by one measure stands at the highest since 2009.

Meanwhile, dollar-wielding global investors are able to use favorable cross-currency basisswap rates to turn Japan's 10year yield into a fixed coupon equivalent of 2.6 percent.

Investors are buying shorterdated debt "as there aren't enough 30-year, 20-year bonds available," said Tadashi Matsukawa, the Tokyo-based head of fixed-income investment at PineBridge Investments Japan. "It goes to show how the BOJ's negative interest-rate policy is so strong." Yields on 10year government bonds fell 5 basis points to minus 0.10 percent as of 5:28 p.m. in Tokyo from Thursday, after touching the record low, according to Japan Bond Trading Co. The price rose 0.512 yen to 102.018.

Ten-year bonds look relatively cheap compared with other tenors, attracting buyers, Bank of America Merrill Lynch's Ohsaki said. Overseas investors bought a net 994 billion yen ($8.9 billion) in Japanese bonds during the week ended March 11, the most in a month, according to Ministry of Finance data on Thursday.