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Yen jumps to 2014 high as Japan 10-year yield drop

Sydney - The yen strengthened past ¥115/$ for the first time in more than a year and Japan’s benchmark 10-year yield fell in an unprecedented decline below zero as haven assets benefited from concern that global growth is fading.

Japan’s currency, which climbs in times of turmoil thanks to the nation’s current-account surplus, rose against all 31 major peers as the Topix index of shares tumbled more than 5%.

The yield on the nation’s 10-year notes has dropped from 0.22% on January 28, the day before the central bank unexpectedly announced it would lower rates on excess reserves to minus 0.1%.

Worldwide financial turmoil has halted the US dollar’s one-and-a-half-year climb as traders unwind bets that the Federal Reserve will tighten borrowing costs this year after increasing rates in December for the first time in almost a decade.

“The yen by default looks to be the safest,” said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “Soft US data is raising speculation that the pace of rate increases will be slow. Investors have already stocked up on dollars, so they don’t need more.”

The yen surged 1.1% to ¥114.63/$ as of 07:15, and touched ¥114.21, the highest since November 2014. It gained 1% to 128.38 per euro. The dollar fell 0.1% to $1.1209 against Europe’s shared currency.

Volatile markets

Global currency volatility rose to as high as 11.77%, according to a JPMorgan gauge. Japanese government bonds of all maturities rallied Tuesday, with the five-year yield dropping six-and-a-half basis points, or 0.065 percentage point, to a record minus 0.245%. The 10-year yield reached minus 0.01%, the first such maturity below zero for a Group-of-Seven economy.

Japanese bonds are climbing as sovereign securities rally worldwide, with the 10-year Treasury yield touching 1.68%, the least since February 2015. A measure of global stocks has dropped 10% this year on concern growth is slowing in China, and as slumping oil prices undermine policy makers’ efforts to revive inflation.

Below zero

About 29% of the outstanding debt in the Bloomberg Global Developed Sovereign Bond index was yielding less than zero as of 17:00 in New York on Monday. Swiss 3% notes due in 2018 were offering the lowest yield in the index, according to data compiled by Bloomberg.

The yen has climbed against its 16 major counterparts this year despite a surprise move by the Bank of Japan to embrace negative rates at the end of January. Investors rattled by increasing volatility across financial markets have brushed aside the easing and continued to buy yen and exit bets on currencies that offer higher yields.

‘Deflationary mindset’

“Markets are seeing the negative side of minus rates, that it is weakening financial institutions and that it’s not a reflationary policy but is essentially planting a deflationary mindset in people,” said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management. “People are skeptical that further monetary policy action can help lift the economy.”

The yen’s biggest gains since December 31 have been a 14% appreciation versus the Mexican peso, a 10% advance against the South African rand and an almost 9% climb versus the New Zealand dollar. It has strengthened 5% against the greenback.

“It’s clear that rough moves can be seen in the overall market,” said Japanese Finance Minister Taro Aso in Tokyo on Tuesday. “We’ll continue to closely watch the FX market.”

Bets on a Fed interest-rate increase before year end dropped to 30% on Monday, from 53% on Friday, futures trading shows. Focus will turn to Fed chair Janet Yellen’s Congressional testimony in Washington this week for clues on how policy makers view the likelihood of a near-term increase in the benchmark.

“The trend in currency markets is still toward dollar selling as expectations for Fed rate increases this year are being scaled back,” said Keisuke Hino, a foreign-exchange trader at Mizuho Bank in New York. “If the risk-off sentiment is driven by oil and stock prices, there is no change in the preference for perceived safe assets such as the yen and the euro.”

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