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Credit Insights

Japan Follows ECB Down Monetary Path to Negative Interest Rates

Healthcare rocked by political rhetoric.

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Like Pavlov's dogs salivating to the dinner bell, most asset markets across the globe rallied last Friday in response to the surprise interest rate cuts by the Bank of Japan. The BOJ lowered the rate on excess reserves (the amount a bank holds at the central bank greater than the required amount of reserves) to negative 0.1% and reduced the rate on required reserves to 0%. This was a surprise to the market, as the governor of the BOJ as recently as a week ago had said Japan would not follow the lead of the European Central Bank into negative interest rate policy. The BOJ has now joined a growing club of central banks that have entered the world of negative interest rates, including the ECB, Swiss National Bank, Sweden's Riksbank, and Denmark's Nationalbank. The intent of the negative rate is to spur banks into lending excess reserves as opposed to paying the central bank to leave those reserves on deposit. The hope is that the additional lending will stimulate economic activity. Additionally, the negative interest rates will effectively debase the yen in order to import inflation from across the world.

Sovereign bonds across the developed markets rallied, with the bonds of many countries reaching all-time highs and pushing yields down to their historically lowest rates. For example, the yield on the Japanese 10-year bond dropped to 0.10% (that is not a typo), the 10-year German bond dropped to 0.33%, and the Swiss 10-year bond dropped even further into negative territory at (0.25)%. According to the Financial Times, there is now a record $5.5 trillion worth of government bonds across the world that trade with a negative yield. Even the 10-year debt of countries such as Spain and Italy, which just a few years ago were thought to be near insolvency, are trading at 1.51% and 1.42%. U.S. Treasury bonds rallied, but compared with other sovereign bonds, the yields appear attractive. The 5-year bond ended the week at 1.34%, the 10-year at 1.93%, and the 30-year at 2.76%.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.