Japan's Pay-to-Lend Craze Deepens as Repo Rate Falls to Record

Demand for Japanese government debt is so strong since the start of the central bank’s negative interest rate policy that it’s turned the market for repurchase agreements on its head.

Dealers who in normal circumstances would pay to borrow overnight cash through repurchase agreements -- offering debt as surety of repayment -- are instead willing to pay to get access to the collateral. Demand for government securities is so strong it pushed the repo rate for transactions starting the next business day to minus 0.086 percent on Thursday, a record low in data from the Japan Securities Dealers Association stretching back to October 2007.

It’s another instance of how investors are desperate to lend money in the world’s second-largest sovereign-bond market. The government got paid to borrow for a decade for the first time at an auction on March 1, as negative rates added to pressure on yields from the Bank of Japan’s quantitative easing program, which has undermined Liquidity in the market. The 10-year note yield dropped to a record minus 0.1 percent this week.

“Financial institutions that offer bonds in Exchange for funds have grown more reluctant to borrow as the BOJ’s frequent purchase operations decrease the amount of debt available,” said Kenji Sato, a manager at the planning and research department of Central Tanshi Co., a Tokyo-based money-market dealer and broker. “Meanwhile, financial institutions with excess funds want to lend them out to avoid the application of the BOJ’s negative interest rate.”

Global Stresses

Stress is also emerging in the U.S. repo market, where so many traders are betting on a decline in Treasury prices that they’re struggling to find the securities to close out the positions. In a sign of climbing demand for the newest 10-year issue, the overnight repurchase agreement rate was about minus 3 percent at in New York on Thursday, according to ICAP Plc data.

In Japan, there’s an element of seasonality too.

“One reason the repo rate is dropping is demand to hold Japanese sovereign debt at the end of the fiscal year,” on March 31, said Tomohisa Fujiki, the head of interest-rate strategy for Japan at BNP Paribas SA in Tokyo. “In addition, the BOJ’s current-account balance tends to increase around this time, and that may also be exerting some influence on the market.”

--With assistance from Daisuke Sakai To contact the reporters on this story: Kevin Buckland in Tokyo at kbuckland1@bloomberg.net, Masaki Kondo in Singapore at mkondo3@bloomberg.net, Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Jonathan Annells

By: Kevin Buckland, Masaki Kondo and Shigeki Nozawa

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